Globally, few speeches are watched as closely or analysed in as much detail as the US Federal Reserve chair’s speech at the symposium hosted by the Kansas City Fed every year for central bankers, finance ministers, academics and other financial leaders at Jackson Hole, Wyoming.
And if the US Fed’s chair happens to be new, interest is almost fever-pitch. So it was that Friday’s speech by Kevin Warsh, who had taken Fed leadership just 100 days earlier, held the world of finance riveted.
In the most detailed comments so far from someone who has made no secret of his disdain for ‘forward guidance’ and believes in keeping his cards close to his chest, Warsh made two things clear.
One, it is the “Fed’s job to deliver stable prices.” And two, with US inflation running above its 2% target, the central bank’s “predominant focus right now should be on prices.”
The message? Contrary to widespread worries that President Donald Trump’s appointee would do the White House’s bidding, Warsh will do what the role demands on monetary policy. For central banks and financial markets across the globe, this is reassuring.
Especially since it comes close on the heels of US Treasury Secretary Scott Bessent roiling the American bond market by wading into what’s clearly Fed territory with the government’s stepped-up buybacks of Treasury bonds.
Beyond its affirmation of inflation control, Warsh’s speech is notable for setting out what he called seven “key principles” that “should guide the conduct of monetary policy.”
First, trends, rather than isolated data points, will be the Fed’s pole star. This means the data it relies on should be as relevant, up-to-date, accurate and actionable as possible.
Second, the Fed’s job is to ensure aggregate demand is broadly consistent with overall supply. However, since it can only infer “what is really happening on the supply side,” evaluating current and expected balances between those two forces is imprecise.
Third, price stability is “not self-executing, nor is inflation necessarily mean-reverting.” In other words, there is no room for complacency in the Fed’s delivery of stable prices.
Fourth, the Fed has a dual mandate: price stability and maximum employment. Achieving both over the medium term is “not an either-or proposition” with each at cross-purposes with the other, since high inflation harms economic prosperity. With the Reserve Bank of India (RBI) mandated to ensure price stability while keeping in mind the objective of growth, this point has special resonance.
Fifth, short-term rates of interest are the main tool to achieve that dual mandate. In Warsh’s words, “Unconventional policies to spur economic activity may suit genuine crises, but should otherwise be used sparingly, if at all.”
Sixth, money supply matters. It is unwise to ignore the ultimate effects of money on financial conditions and prices.
Finally, “a quieter Fed, more purposeful in its communications, is better able to meet its objectives.”
Though Warsh’s Jackson Hole address was framed with America’s central bank in mind, the principles he spelt out are no less relevant for other central banks, RBI included.
In India too, when it comes to inflation, the buck stops with its central bank under the regime we formally adopted a decade ago. On how much and what a central bank must convey to markets, however, the jury is still out. It’s far from certain that less is necessarily more.