A Fed chair never loses a vote: Warsh argues against guidance while paving the way to a hike
Posen grades Warsh's Jackson Hole speech a B-, argues he is talking against forward guidance while already laying the groundwork for a hike, and predicts the Fed will raise rates 75-100 basis points over the next six months.
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Warsh never says he wants a hike, but the whole speech lays the groundwork
Posen grades Warsh's Jackson Hole speech a B-, though he says it deserves to be treated as a B+ given the chaos of the previous two months. The fourth section of the speech systematically lists the reasons inflation could persist or even move higher, and then never says "therefore we must tighten." Posen reads that as deliberate preparation: if the Fed does not hike next, markets will assume it caved to Trump's pressure. Posen himself has been arguing for a hike for months, because the inflation is real. Warsh also pinned down the 2% core PCE target and refused to use wage inflation as a forecasting indicator; both are mainstream practice.
— Adam PosenWithout defining the "right pace," a return to target is an empty promise
What worries Posen most is Warsh's closing line: inflation needs to come down in the "right direction" at the "right pace" — and he never defines what the right pace is. With no constraint on speed, "returning to target" means nothing. From his confirmation hearing through two press conferences to his remarks at the ECB's Sintra forum, Warsh has consistently reserved the right to decide at the last minute, refusing to commit in advance to the indicators he is watching. That is close to Greenspan's style in 1999, but what let Greenspan carry it off was personal ability and control of his committee; the moment he got something wrong, the entire structure of credibility would go down with it.
— Adam PosenA Fed chair never loses a single vote, and that is the risk
Posen explains the culture of the Fed's committee: unlike the ECB, which pursues consensus, the Fed has historically given its chair more power. More important, there is an unwritten rule — only a handful of people dissent at any meeting, and the chair never loses a vote. When Volcker realized he might lose one, he simply announced that this would be his last meeting. That culture leaves the committee very weak as a check on the chair, which is why Warsh's style of preserving his own discretion carries more risk than he himself imagines.
— Adam PosenInsulting the central bank is not dangerous; making it help sell debt is
Posen distinguishes two kinds of political pressure. Ordinary abuse of the central bank is part of the game, and can even give the bank cover to take the blame when that is needed. The genuinely dangerous case is when a president or a Treasury secretary asks the central bank to help sell government debt; there the bank has to answer, "I am here to help you and your successors sell government debt" — and must never manipulate or cheat. Trump's threats to the Fed go far beyond rhetoric: trying to strip regional Fed presidents of their votes, disrupting the staggered terms, changing the mandate, going after the budget. Those directly damage functional independence.
— Adam PosenThe most radical reform on offer may be central banks saying less
Posen thinks the communications committee led by Mervyn King is the most likely source of a radical proposal. King himself is a founder of inflation targeting and of fan charts, but since retiring he has publicly questioned central banks' forecasting ability and their supply of information: too much noise makes markets dependent on official guidance, which creates moral hazard and bubbles. Peter Fisher takes the same view, arguing that central-bank "certainty" makes markets less sensitive to risk. The two of them may push for less information released rather than more. The hall-of-mirrors metaphor in Warsh's prepared text already concedes that markets are not necessarily right.
— Adam PosenAn economist who joins an AI company no longer has an independent voice
Posen says the flow of economists into AI companies is not unprecedented — it happened in the internet era too — but this time it is more troubling. Companies like Anthropic are hiring economists partly in order to design policy for the AI transition, and these scholars genuinely believe they are doing good. The problem is that once you are inside, you are inside a corporate hierarchy: you lose your independent voice and your freedom to choose what to work on, and outsiders will reasonably discount your views. What Posen hopes for is that scholars stay at research institutes, on a low six-figure salary, and keep their public influence.
— Adam PosenAI substitution has not happened yet; programmer employment is still growing
Posen says the labor-market data does not yet show AI substitution — employment growth is continuing even for programmers and truck drivers. Brynjolfsson's J-curve holds that firms need time to reorganize their operations, so people and AI will work together for a stretch first. Garicano's messy jobs argument points out that the roles that look easiest to automate in fact contain a great deal of tacit knowledge and human relationships: a truck driver is not just driving. Large-scale substitution may be about five years away, and it will show up first in fewer young people being hired.
— Adam PosenIn six months, rates will be 75-100 basis points higher than now
Posen restates that his earlier forecast of 4% PCE inflation by year-end is coming true, with CPI already above 4% earlier this year. The bigger problem is inflation inertia: energy prices may pull the numbers down slightly over the next month or two, but core services inflation is stubborn, and the three-, six- and twelve-month moving averages are all rising. He expects the Fed to hike in September or December; if it hikes in September it will hike again in December, leaving the fed funds rate 75-100 basis points higher than now six months out. Only then does inflation genuinely begin to come down, and in the meantime it sits in the 3.5%-4.5% range.
— 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 of above-target inflation | 64-65 months | 13:22 |
| Core PCE target | 2% | 5:09 |
| Expected rise in the fed funds rate over the next six months | 75-100 basis points | 54:13 |
| Posen's earlier forecast for year-end PCE inflation | 4% | 51:11 |
| GDP contribution from AI chips that may be understated | 0.3 percentage points | 45:05 |
| How long the Fed chair's dominant position has lasted | About 45 years (since Volcker) | 11:17 |
Glossary
- fiscal dominance
- The government forces the central bank to accommodate fiscal financing, so monetary policy loses its independence.
- fan charts
- Charts that display forecast uncertainty as fanned-out probability bands.
- J-curve
- The path in which a technology's payoff dips when first deployed and only improves markedly after adjustment.
- messy jobs
- Jobs that look easy to automate but in fact involve tacit skills and human relationships.
- staggered terms
- Regional Fed presidents' appointments are offset in time, preventing the whole cohort from turning over at once.
How to listen
Macro traders tracking the Fed's path, economists studying AI's effect on jobs, and policy researchers who care about central bank independence.
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