Wash's latest speech: The era we are in

Author: Caixin News

At 10 PM Beijing time on Friday, Federal Reserve Chairman Kevin Walsh appeared at the Jackson Hole annual meeting, delivering a speech titled "In Our Time."

Overall, Walsh's remarks at Jackson Hole conveyed a distinctly cautious hawkish signal. He believes that the U.S. economy and labor market remain resilient, the current financial environment cannot be considered significantly restrictive, and inflation is still significantly above the Fed's 2% target, therefore price issues should continue to be the primary focus of monetary policy.

In his speech, the Fed Chairman emphasized: "My standard is: We must have confidence that underlying inflation is clearly and sufficiently rapidly approaching our target. Otherwise, we still have work to do."

Walsh also stated that although the CPI and PCE price data for the summer were better than expected, "they did not lead me to believe that there has been a meaningful improvement in the underlying inflation trend."

In response to external criticism of his "persistence in not providing forward guidance," Walsh took this opportunity to provide an unprecedented in-depth explanation.

Walsh believes that forward guidance is necessary during times of crisis but should be significantly weakened during normal times. He argues that prematurely signaling or even resembling a commitment to future interest rate paths may superficially enhance transparency but could actually create new misguidance: on one hand, it constrains the Fed's future flexibility to make decisions based on economic changes, and on the other hand, it leads the market to overly trade around "guessing the Fed" rather than independently assessing economic fundamentals.

He is particularly wary of the resulting "hall of mirrors problem"—if the market prices based on Fed guidance, and the Fed in turn references market prices for judgment, both sides may ultimately ignore new economic changes.

To this end, Walsh neither supports the normalization of forward guidance nor is willing to provide a mechanical policy "reaction function"; instead, he prefers to reduce prior commitments, allowing the market to form its own judgments while the Fed maintains sufficient freedom to make decisions based on real-time data, trends, and more robust policy rules whenever a decision is truly needed.

As of 10:45 PM Beijing time, following Walsh's speech, the CME "FedWatch" tool indicated that the probability of a Fed rate hike in September rose to nearly 60%, up from just 35% the previous day. Spot gold briefly plummeted by $50, with the latest quote dropping to around $4,550 per ounce.

(Source: TradingView)

Below is the full translation of Walsh's speech (the speech text is sourced from the Fed's official website, translated with the assistance of artificial intelligence).

"In Our Time"

Federal Reserve Chairman Kevin Walsh

August 28, 2026

Delivered at the Economic Policy Symposium "Financial Innovation: Impacts on Payments and Policy" held in Jackson Hole, Wyoming. The symposium is hosted by the Kansas City Fed.

Thank you all. I am pleased to be here again and delighted to see so many familiar faces. I have been looking forward to this weekend—what better place to commemorate my 100th day as Fed Chairman than here?

For the warm and thoughtful hospitality here, everyone in attendance should thank Jeff Schmid, President of the Kansas City Fed, and his colleagues. Jeff, thank you to all of you.

Jeff and the other organizers have also arranged some leisure activities for later today. I suggest everyone be very cautious in making choices.

As I learned many years ago, you can experience two completely different hikes on the trails around Jackson Hole. I can summarize my past hiking experiences with former Fed Vice Chairman Don Cohen in two words: I survived. Those marathon-style "death marches" powered by sheer will showed me a side of Don that I was previously unprepared to face.

There is another type of hike—I would associate it with my old colleague, former Fed Chairman Ben Bernanke. Walking with Ben is much more leisurely, just a relaxed stroll along the winding paths of the Rockefeller Preserve.

So, before setting out, check your physical condition and ask yourself: "Is today a Cohen day or a Bernanke day?"

The best part of this gathering is that it helps all of us clear our minds and think more clearly about the world and era we are in. For me, this is the right place, and you are the right audience, to delve deeply into the most important ideas.

"Innovation" is the theme of this conference. I believe that the public and the market, through their collective wisdom, have recognized that the Fed's innovation in policy implementation will help us achieve price stability while also achieving full employment.

Let me briefly outline the content of my speech this morning. You can call it an outline… or a hiking roadmap… but please do not call it "forward guidance."

First, I will discuss several long-term issues that the Fed is currently studying, including the latest universal technology—artificial intelligence (AI)—and where it might lead the economy.

Next, I will talk about the practice of forward guidance and the interaction between central banks and financial markets.

Then, I will introduce some core principles that I believe should guide the implementation of monetary policy.

Finally, I will share my assessment of the current economic situation.

Preparing for the Future Policy Environment

Against the backdrop of the unchanging Teton mountain scenery, what we are examining here is an economic picture that is anything but static.

Not long ago—on the eve of the 2008 crisis and in the decade that followed—economists and policymakers were still discussing "secular stagnation" and "global savings glut." A widely accepted view at the time was that excess capital would remain idle on the sidelines for a long time due to a lack of sufficiently attractive investment opportunities. All good things had already been invented. Therefore, economic growth would be sluggish and slow.

However, times have indeed changed. We have reached a historical turning point.

One of the most obvious examples is artificial intelligence—this term, which has an 80-year history and is now used to refer to the latest wave of technology—has progressed at a pace that exceeds even the predictions made by its most enthusiastic advocates a few years ago.

The potential for significantly higher economic growth is on the rise. An ever-expanding pool of capital is flowing into various AI-related infrastructures. Some sort of "super Moore's Law" seems to be unfolding. At the same time, scale laws are also changing the methods and speed of innovation.

Capital and labor are coming together to create large language models that are at the core of AI. Users purchase tokens to gain access to these models. Reports indicate that the annual sales of tokens from just two leading AI labs have already exceeded $100 billion, growing over 500% from a year ago.

The Fed is closely monitoring all of this. We recognize that AI is a new variable—even potentially a new factor of production—that will impact the economy and the implementation of monetary policy. This also opens up several significant research directions:

Will the application of AI drive a significant and sustained increase in productivity across the economy? If so, when will it happen?

Will the use of tokens complement labor or compete with it? Will the next generation of AI models require higher capital intensity, or will the models themselves ultimately help us design solutions that require less capital input?

Other unresolved questions include what kind of market structure will ultimately emerge. It is currently unclear where capital returns will ultimately land and how long this process will take. In the early stages, how much of the economic surplus will flow to the owners of scarce assets—AI labs, chip manufacturers, energy producers, and cloud service providers? Over time, how much value will ultimately flow to businesses and consumers? What do these changes mean for workers? What broad impacts will they have on the Fed's employment objectives?

Similarly, we currently do not know what the equilibrium price of tokens will be. Will different types and qualities of tokens emerge in the future, leading people to be willing to pay increasingly higher prices for access to the most cutting-edge and best models? Will the token prices of older generation models eventually fall to their marginal cost levels?

We will delve into these issues through a "Productivity and Employment Working Group." I recently had preliminary discussions with the heads of this working group and four others, and their progress is encouraging.

However, it should be clear that the recommendations from these working groups will be submitted in the future and will not affect our decisions made in the current policy environment. But I believe that investing in such thinking today for future policy challenges will better prepare us.

Forward Guidance and Alternative Approaches

While these working groups are at work, I have not been waiting; I have already begun to promote innovation at the Fed to truly adapt it to its responsibilities. For example, I have begun to change the form and function of the so-called Fed Chairman's "forward guidance." As you may know, I have long been uneasy about prematurely announcing future policy decisions. I prefer to take another path… and I will explain why.

Transparent communication about future policy decisions is not inherently a virtue. Communication must serve the Fed's most important responsibility: to get monetary policy right.

During the global financial crisis, my colleagues and I established forward guidance as a normalized practice. At that time, it was essential, and we rolled it out with great fanfare. But like other legacies left by past crises, I believe this practice has existed for too long.

In normal times, the role of forward guidance should be limited and should have clear boundaries. Otherwise, it may create ambiguity in the name of clarity. Over-disclosure of the policy discussion process and making excessive commitments about future policy decisions can mislead markets, businesses, and households. Moreover, I believe that when policymakers make near commitments about interest rates throughout the economic cycle, we effectively limit our freedom to make the right choices when decisions truly need to be made.

To get policy right, we must also correctly handle the relationship between financial markets and central banks. The Fed needs to receive clear market signals, and these signals should be as unfiltered as possible… including the internal structure of the market… the levels and changes in asset prices across sectors… the prices and trading volumes of U.S. Treasuries… the foreign exchange value of the dollar… the cost and availability of credit… and the prices of a wide range of commodities.

These indicators and others should help the Fed assess recent economic activity and inflation prospects throughout the business cycle. They should also reveal the state of the broader financial environment… as well as the risks and uncertainties in the financial cycle.

At the same time, market participants themselves should also track real information across the economy. They should form their own judgments; develop their own expectations for output, employment, and inflation; and always remain highly aware of risks.

The Fed should remain humble but must not be naive. The Fed plays a crucial role in the economy and markets, and our policy tools are powerful. We determine the path of short-term interest rates. Therefore, market participants will always try to predict what we will do next. But we should not indulge a mechanism that allows market participants to primarily decide their next trade by guessing the Fed.

Economic literature has long described this distortion effect: this is known as the "hall-of-mirrors problem." If the market largely relies on the Fed's guidance, and the Fed in turn relies on market prices, we are all more likely to overlook new changes… more likely to be caught off guard when circumstances suddenly shift… and more likely to make mistakes in policy-making.

Ironically, market participants may not be the ones who bear the greatest cost of the "hall-of-mirrors problem." Those who are most severely harmed are likely to be those without financial assets. If the Fed misjudges inflation and the economy, who will suffer the most severe consequences? It is not the high-net-worth individuals in the financial markets. Ultimately, it is the hardworking ordinary Americans who have to face excessive inflation or suddenly unstable employment.

So, if forward guidance does not apply in normal times, should the new Fed Chairman at least commit to providing a clear reaction function? Of course, he should tell us where interest rates will go if the data is clearly too hot or too cold.

I would hope that our understanding of the economy is indeed precise enough to provide a mechanical, fail-proof answer—like a simple function that could strictly rely on something akin to a Taylor rule. But our knowledge is far from reaching that level—at least not yet—and the most important factors determining appropriate monetary policy will also change over time.

Demonstrating the Fed's reaction function through predictions works better in theory than in reality, and better in the lab than in actual operations. I am not the only one who has noticed this. For example, the forward guidance in 2021 likely slowed the Fed's subsequent policy response to high inflation.

During my tenure as Chairman, my colleagues and I will strive to build more reliable models and more robust rules to guide policy decisions. We will undertake this work on the basis of the understanding that accurately predicting the economy remains just a goal. When geopolitical factors, global supply chains, and technology are changing at such a rapid pace, it is wise to remain humble about what we can know and what we cannot know.

In the same spirit, for any issues that may affect the Fed's monetary policy decisions, we should fully consider a variety of different viewpoints. If our goal is to make optimal decisions, we should not exclude differing views on the economy.

So, how can we chart a better path for policy planning? In the next part of my speech, I will share some core principles that guide my thinking on the appropriate implementation of monetary policy… and then I will fulfill my promise to discuss my assessment of the economy.

Core Principles

Now, let’s talk about principles…

First, I notice that in our field, people often mistake yesterday's news for what is happening at this moment. The real challenge is to distinguish between the two. In other words, we must constantly test reality to ensure that we do not base future-oriented policies on outdated or inaccurate data. We should not rely on isolated data points. Trends are what matter most. The Fed is a decision-making institution. We must make choices amid uncertainty, so the data we rely on must be as relevant, timely, accurate, and directly applicable to decision-making as possible.

Second, the Fed takes action to ensure that total demand in the economy broadly aligns with total supply. However, we can only directly observe economic activity itself. We can never directly see what is truly happening on the supply side; we can only infer it. Therefore, assessments of the current and future balance between total supply and total demand are inherently imprecise.

Third, let there be no misunderstanding: the Fed's 2% price stability target, measured by the Personal Consumption Expenditures (PCE) price index, is a firm and fixed goal. We must also clarify another aspect of this target: price stability does not happen automatically, and inflation does not necessarily have a natural tendency to revert to the mean. Achieving price stability is the Fed's job.

Fourth, the Fed also bears the responsibility of achieving maximum employment. Achieving the two goals of the dual mandate in the medium term is not a "choose one" issue. I do not believe that the Fed's dual mandate is in conflict. After all, high inflation itself can severely undermine economic prosperity.

Fifth, short-term interest rates are the primary policy tool for achieving the dual mandate. Unconventional policies taken to stimulate economic activity may be suitable for true crisis periods but should be used sparingly or not at all in other circumstances.

Sixth, money matters. This view is not popular today, but I believe there is indeed an important relationship between money and monetary policy. We should pay attention to the money created by the central bank and also to the money coming from banks and the financial system. Indeed, financial innovation and other factors will change the mechanisms connecting the monetary base, the velocity of money, and the broader economy. But this is no reason for us to ignore the ultimate impact of money on the financial environment and prices.

Finally, a quieter, more purpose-driven Fed will be better able to achieve its goals. And whether we fulfill our responsibilities can also be held accountable—this is the only true standard for testing our credibility. To borrow a phrase from General Chuck Yeager: "When it comes time to show results, there are either reasons or results."

Current Economic Situation

So, under these principles, how do I assess today's economy? What is really happening outside?

You may have seen the FOMC's unanimous judgment from the July meeting: the labor market is stable, economic output is robust, but inflation remains too high. Most of my colleagues and I believe that a wiser approach is to wait for more new information between the two meetings—especially considering potential new changes in supply chains, investment flows, and geopolitics—before determining whether it is appropriate to adjust interest rate policy. At the same time, we have collectively stated that we are ready to take action as needed.

Personally, I am deeply impressed by the overall performance of the U.S. economy today, and it appears to have strengthened. One standard for judging whether an economy is strong is how well it can withstand shocks. From this perspective, both the "Main Street" of the real economy and "Wall Street" of the financial markets have demonstrated extraordinary resilience.

Here are a few observations:

Business capital expenditures—the "seed grain" for future economic growth—are growing rapidly. The four-quarter growth rate of equipment and intangible asset investment is about 9%, the highest growth rate since 2021. More than half of this year's capital expenditure growth can likely be attributed to AI-related infrastructure development.

For S&P 500 companies, profits have grown over 20% in the past year. Compared to historical levels, corporate profit margins are quite high. Overall market volatility is low. We are closely monitoring the internal structure of the market, observing performance across sectors.

Market expectations for future growth in capital expenditures and corporate profits are quite high. I will continue to observe changes in their growth rates, known as the "second derivative." The subsequent impacts—on asset prices, business confidence, consumer income, and consumer spending—are also very important.

The credit spreads for corporate bonds and leveraged loans are close to the lower end of historical ranges, and the issuance in these markets has been quite strong this year. If we step out of the fixed income market and look at the banking sector, the July survey of senior loan officers showed that banks told us that the credit standards for commercial and industrial loans are currently on the relatively loose end historically. This also helps explain why there has been growth in such loans this year. The credit and loan markets show almost no signs of being constrained by monetary policy.

Certain sectors—such as housing and agriculture—are indeed under pressure. But overall, I would find it difficult to describe the broad financial environment as "restrictive."

Despite experiencing various shocks, real consumer spending remains healthy, growing over 2% in the past four quarters. When looking at consumption in conjunction with the strong investment we observe, Private Domestic Final Purchases (PDFP) have also increased. So far this year, the growth rate of PDFP is close to 3%. Compared to GDP, this indicator typically contains stronger economic signals, and the trend it currently exhibits is also positive.

On the employment side of the Fed's dual mandate, the U.S. is performing well. The labor market is quite stable. The unemployment rate is currently 4.1%, still low by historical standards, and has shown little significant change over the past few years. The number of initial unemployment claims, calculated as a four-week moving average—a well-tested and robust real-time indicator—is currently close to its lowest level in decades.

In my view, the relatively low turnover rate in the current labor market is partly due to the large-scale re-matching that occurred between employers and employees after the pandemic.

When labor supply is no longer growing, the number of new jobs added each month will naturally be lower. There will always be areas of the labor market worth monitoring—such as recently graduated young people. But overall, those who want to work are largely able to keep their jobs or find jobs. They may certainly worry about potential disruptions in the labor market in the future, but so far, I believe the U.S. labor market is consistent with a state of full employment.

However, on the price stability side of our dual mandate, the data is more concerning. The Fed's preferred inflation measure—the PCE price index's increase over the past 12 months—is currently 3.7%, while the increase over the past six months annualized is 4.1%. The comparable measure of the Consumer Price Index (CPI) is also high, and both the core PCE and CPI inflation measures are elevated. None of these indicators is perfect, but they all tell a similar story: inflation remains above our 2% target. Therefore, the Fed's current primary focus should be on prices.

The task of policymakers is to identify potential trend inflation, which means excluding various special and individual factors to assess the general price changes across the economy. We need to determine whether underlying inflation is rising, falling, or stagnating. We want to understand not only the direction of its change but also the speed of that change. Each of the broad inflation indicators mentioned has shown significant declines compared to the peaks of 2022. However, the progress made over the past two years has been quite limited.

Moreover, while the PCE and CPI data this summer were better than expected, these data did not lead me to believe that there has been a meaningful improvement in the underlying inflation trend.

Data shows that wage growth is currently also relatively moderate. However, when tracking underlying inflation, wage growth has long been shown to be an unreliable predictor of future inflation.

To assess underlying inflation, I believe it is very helpful to break down the 199 individual components of the PCE price index. Over the past 12 months, 54% of the items in the PCE basket have seen price increases exceeding 3%. This proportion is significantly lower than the peak of about 77% observed after the pandemic but still far above the pre-pandemic average of 32% over 20 years.

If we look only at the most recent six months, the conclusion is similar: 49% of the items in the PCE basket have seen annualized price increases exceeding 3%. Again, this is significantly lower than the post-pandemic peak but remains at a relatively high level.

The recent overall rise in commodity prices is also worth noting. We need to determine whether these trends currently indicate an upward risk for inflation.

Additionally, it is equally important to consider whether the inflation data that has persisted for more than five years has seeped into people's expectations. The good news is that medium-term inflation expectation indicators remain stable overall. The inflation compensation indicators in the swap market also convey similar and strong signals.

Especially considering recent developments, market prices still reflect a confidence—believing that we can achieve price stability. This reflects both the credibility of the Fed as an institution and aligns with the Fed's best traditions. And I can assure you… the market is right.

From an economic history perspective, market-based inflation expectation indicators have a characteristic: they tend to remain very resilient and robust until they lose stability. These expectations do not change easily, and they are still well-anchored at present. But we must keep a close watch. Ensuring that inflation expectations do not become unanchored is the Fed's job.

One signal that no one should ignore is this: the sustained, elevated inflation over the past 65 months clearly falls on the central bank. And that is exactly where the responsibility should lie.

My standard is: we must have confidence that underlying inflation is clearly and sufficiently rapidly approaching our target. Otherwise, we still have work to do. This is our job… our mission… and it is our responsibility to fulfill.

Conclusion

Standing here today, what I commit to is a discipline, not a specific policy decision.

In such a significant era, my colleagues and I at the Fed are certainly not the first to hold these positions. We are determined to cherish the present and to complete our work to the highest standards we can achieve.

We approach our responsibilities with humility, yet with firm resolve. Much depends on the choices we make. Sound monetary policy can help families and businesses thrive. If monetary policy is effectively implemented, it can expand and deepen the momentum of U.S. economic growth… while helping to solidify America's leadership in the world. I also know that our country needs us to think carefully and act wisely.

It is a great honor to serve the Fed again. I am sincerely grateful for the encouragement and valuable advice from my colleagues… and for the support from many of you here today… and I appreciate your patience in listening this morning. Thank you.