The End of the Era of Excuses: The New Doctrine of the Fed Chair - Which May Affect the Entire World
Kevin Warsh's speech at Jackson Hole marked a shift in Fed policy: moving away from excessive market signaling and returning to full accountability for inflation without external excuses.
Kevin Warsh arrived at the central bankers' summit in Jackson Hole, Wyoming, for the first time as Chair of the Federal Reserve, using the global stage not only to outline his view of the American economy but to redefine the role of the Fed. The message was surprisingly hawkish, signaling that Warsh is preparing the ground for rate hikes as long as inflation remains elevated.
An Economy That Defies Easing
Warsh’s analysis is straightforward: the economy is robust, the labor market is tight, and financial conditions are not restrictive. Investments in intangible assets and AI are growing at an annual rate of 9%, while S&P company profits have jumped over 20%. With inflation at 3.7%—far from the 2% target—Warsh argues that there is no justification for monetary easing. The market has taken note, with the probability of a September rate hike rising to 50%.
The End of Forward Guidance
The most significant innovation in Warsh’s speech is his rejection of Forward Guidance (FG). He argues that central banks' attempts to manage market expectations through hints create a "hall of mirrors" that misleads households and businesses while tying the Fed's hands.
Warsh prefers a return to "clean" market prices—yields, exchange rates, and credit spreads—that reflect economic reality rather than reactions to the Fed Chair’s latest comments. While this may increase volatility, it restores the Fed's ability to act decisively as conditions change.
Absolute Accountability
The third and most radical pillar of his doctrine is a shift in responsibility. Warsh insists that the 2% inflation target is "fixed and rigid" and that the Fed is solely responsible for achieving it. He explicitly rejected the habit of blaming inflation on pandemics, oil prices, or supply chains.
This shift represents a deep correction of the central banking model established after the 2008 crisis. If Warsh succeeds, the impact will be global. For Bank of Israel Governor Amir Yaron, who is heavily influenced by the Fed, adopting a similar "quieter" approach could significantly alter the dynamics of the Israeli capital market and increase political pressure on the central bank.
