A Fed Chair Never Loses a Vote: Warsh Talks Against Forward Guidance, but His Path Is Paved for Hikes
Posen gives Warsh's Jackson Hole speech a B-, saying he talks against forward guidance but is actually paving the way for rate hikes, and predicts the Fed will hike 75-100 basis points over the next six months.
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Warsh didn't say hike, but the whole speech was paving the way
Posen gives Warsh's Jackson Hole speech a B-, but thinks it can be treated as a B+ given the chaos of the previous two months. The fourth section systematically lists reasons inflation could persist or even rise, yet never says 'therefore we must tighten.' Posen sees this as deliberate groundwork: if no hike follows, markets will speculate it's a capitulation to Trump's pressure. He himself has been advocating hikes for months because inflation is real. Warsh also reaffirmed the 2% core PCE target and refused to use wage inflation as a forecasting indicator—all mainstream moves.
— Adam PosenWithout defining the 'right pace,' returning to target is empty talk
Posen's biggest concern is that Warsh concluded his speech by saying inflation needs to fall in the 'right direction' at the 'right pace,' yet never defines what the right pace is. Without a pace constraint, 'returning to target' is empty talk. From his confirmation hearing, two press conferences, to the ECB Sintra speech, Warsh has reserved the right to decide 'at the last minute,' refusing to pre-commit to his own indicators. This is close to Greenspan's 1999 style, but Greenspan could sustain it through personal ability and control of the committee; once mistakes happen, the whole credibility collapses.
— Adam PosenA Fed chair never loses a single vote
Posen explains Fed committee culture: unlike the ECB's pursuit of consensus, the Fed has historically given the chair more power. More critically, there's an unwritten rule—only a few dissent votes per meeting, and the chair never loses a vote. When Volcker found he might lose a vote, he simply announced it would be his last meeting. This culture makes the committee's ability to correct the chair very weak, so Warsh's 'reserved discretion' style carries more risk than he imagines.
— Adam PosenCriticizing the central bank isn't dangerous; making it sell government debt is
Posen distinguishes two types of political pressure: ordinary criticism of the central bank is part of the game, and can even help the central bank 'take the blame' when necessary. What's truly dangerous is when a president or treasury secretary asks the central bank to help sell government debt—the central bank must answer, 'I'm here to help you and your successor sell debt,' and must never engage in manipulation or cheating. Trump's threats to the Fed are far more serious than rhetoric—trying to strip regional Fed presidents of voting rights, disrupt staggered terms, change mandates, and touch the budget directly undermines functional independence.
— Adam PosenThe most radical reform might be making the central bank talk less
Posen believes the communications committee led by Mervyn King is most likely to produce radical proposals. King himself is a founder of inflation targeting and fan charts, but after retirement he has publicly questioned central banks' forecasting ability and information supply: too much noise makes markets rely on official guidance, creating moral hazard and bubbles. Peter Fisher similarly argues that central bank 'certainty' makes markets less risk-sensitive. The two may push for reducing rather than increasing information release. Warsh's 'hall of mirrors' metaphor in his speech already admits markets aren't always right.
— Adam PosenEconomists who join AI companies lose their independent voice
Posen thinks the rush of economists to AI companies isn't unprecedented—it happened during the internet era—but this time it's more troubling. Companies like Anthropic hire economists partly to design AI transition policies, and these scholars genuinely believe they're doing good. The problem is that once inside, they enter the corporate hierarchy, losing independent voice and freedom to choose topics, and their views are reasonably discounted by outsiders. Posen's hope is that scholars stay at research institutes, earning low six-figure salaries, while retaining public influence.
— Adam PosenAI replacement hasn't happened yet; programmer employment is still growing
Posen says labor market data doesn't yet show AI replacement—even programmer and truck driver employment growth continues. Brynjolfsson's J-curve theory holds that firms need time to reorganize business, and there will be a period of human-AI collaboration first. Garicano's messy jobs theory points out that seemingly automatable jobs actually contain a lot of tacit knowledge and interpersonal relations—truck drivers don't just drive. Large-scale replacement might take about five years, and it will first show up in reduced hiring of young people.
— Adam PosenRates will be 75-100 basis points higher six months from now
Posen reiterates his earlier prediction of 4% year-end PCE inflation is materializing, with CPI already above 4% early in the year. The bigger issue is inflation inertia: while energy prices may cause a slight dip in the next month or two, core services inflation is stubborn, with 3/6/12-month moving averages all rising. He expects the Fed to hike in September or December; if September happens, December will follow, and six months from now the federal funds rate will be 75-100 basis points higher than today. Only then will inflation begin to truly decline, hovering in the 3.5%-4.5% range in the meantime.
— Adam PosenIn their own words · checked verbatim
You know, if you were grading it, it's a B-minus speech. Okay. It's a B- speech by normal standards. It's much more positive because of the situation we were in.
Adam Posen2:05
And right direction doesn't mean anything unless you're saying the target. I mean, without the speed, just to emphasize your point, without the speed, then we're back with what we had the last four years, which is inflation's above target.
Adam Posen7:13
Only so many people dissent on the committee at any one meeting. And the chair never loses a vote. Even Volcker, once it was clear he was going to lose a vote, He basically said, next meeting is my last meeting.
Adam Posen12:20
I think the communications fund is going to surprise people. Because both Mervyn and Peter, and I'm only referring to their public statements, have gotten pretty radically skeptical about central bank communications in recent years.
Adam Posen24:34
You're losing your independent voice. What you choose to work on, you may choose not to work on that, which you might have worked on because now you work for this company. So again, is it outright corruption of the sort we're seeing in the Trump administration? No. But it is unsettling.
Adam Posen34:51
I had no idea that the President of the United States would bomb Iran and ignore the fact that disrupting the Straits of Hormones might have some inflationary effects beyond whatever else you think of it. But I knew there was gonna be an inflation shock and we were primed to have more.
Adam Posen53:12
Figures
| Months inflation above target | 64-65 months | 13:22 |
| Core PCE target | 2% | 5:09 |
| Expected federal funds rate increase over next six months | 75-100 basis points | 54:13 |
| Posen's earlier year-end PCE inflation forecast | 4% | 51:11 |
| AI chips' potentially underestimated GDP contribution | 0.3 percentage points | 45:05 |
| Duration of Fed chair's dominant position | About 45 years (since Volcker) | 11:17 |
Glossary
- fiscal dominance
- A situation where the government forces the central bank to accommodate fiscal financing, undermining monetary policy independence.
- fan charts
- Charts that display forecast uncertainty using fan-shaped probability intervals.
- J-curve
- A trajectory where technology initially causes a dip in performance before significant improvement after adjustment.
- messy jobs
- Jobs that seem easy to automate but actually involve tacit skills and interpersonal relations.
- staggered terms
- Arrangement where regional Fed presidents' appointments are offset to prevent collective replacement.
How to listen
Macro traders focused on the Fed's path, economists studying AI's impact on employment, and policy researchers concerned about central bank independence.
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