Warsh's First Jackson Hole — Six-Month Inflation at 4.1% and Conditions Not Restrictive

Fundamentals · 2026-08-28

Chairman Kevin Warsh delivered "In Our Time" at the Kansas City Fed's symposium on his 100th day in office, retiring routine forward guidance and replacing it with a standard rather than a date; PCE inflation 3.7 percent over twelve months but 4.1 percent over six — the recent run-rate is above the annual one; 54 percent of the 199 PCE components rose more than 3 percent over the year against a 32 percent pre-pandemic norm; "I would be hard pressed to describe broad financial conditions as restrictive"; labor markets "consistent with full employment" with claims near their lowest in decades; equipment and intangibles investment up about 9 percent, over half of it AI-related; the two-year yield jumped more than 6 basis points to 4.298 percent while the thirty-year fell 2 basis points to 5.168 percent.

What Is This?

• What it is: The Kansas City Fed's annual economic policy symposium at Jackson Hole, this year themed "Financial Innovation: Implications for Payments and Policy." The Friday keynote by the Fed Chairman is the single most-watched central-bank speech of the year. This was Kevin Warsh's first as Chairman, delivered on what he noted was his 100th day in the job, and it ran roughly thirty minutes across four sections: artificial intelligence, forward guidance, policy principles, and an assessment of the economy.
• Why it matters: Jackson Hole is where Fed Chairs have historically signaled regime changes, and this one did exactly that — not on rates, but on how the Fed will communicate about rates at all. The Fed has been on hold at 3.50-3.75 percent for five consecutive meetings, with three officials dissenting in July in favor of a hike. This speech told markets how the new Chairman intends to decide.
• How to read it: Warsh gave no rate decision and explicitly refused to give a path — the joke early on was that his outline could be called a trail map, "just don't call it forward guidance." What he gave instead was a standard and a set of numbers. Read the numbers, because that is where the message is. The speech is a US government work and quotable in full at federalreserve.gov.

Want the full explainer? Economic News Events, Explained breaks down this release and every other one we cover, in plain English.

Summary

The headline every wire ran was that inflation is still too high. That is true and it is not the news. The news is in a single clause in the economic assessment: the twelve-month change in the PCE price index stands at 3.7 percent, while the six-month change is 4.1 percent. When the six-month run-rate sits above the twelve-month rate, the arithmetic is not ambiguous — the recent pace is faster than the year's average. Warsh stated it in one sentence and moved on. It is the most hawkish number in the speech and it went almost entirely unreported.

He then pre-empted the obvious rebuttal, that this is energy and tariffs rather than inflation proper, by disaggregating all 199 components of the PCE basket. Over twelve months, 54 percent of goods and services rose more than 3 percent. The post-pandemic peak was about 77 percent; the two decades before the pandemic averaged 32 percent. Over six months, 49 percent cleared the same bar. His point is that this is broad rather than idiosyncratic.

There is a tension in his own two figures worth drawing out, because it cuts slightly against him. Breadth is narrowing — 49 percent over six months against 54 percent over twelve — while the rate is accelerating, 4.1 percent against 3.7. Fewer categories are running hot, but the aggregate is running hotter. That combination means the components still rising are rising harder, which is concentration rather than breadth. Warsh half-acknowledges it a paragraph later: "The recent rise in overall commodity prices also bears watching." Set against this week's energy data — gasoline stocks 6 percent below their five-year average, distillate about 14 percent below, Gulf Coast salt caverns drawing 20 Bcf in a week, the Strategic Petroleum Reserve down 28.3 percent on the year — the concentration has an obvious address. It is also the one part of the price level a rate hike does least to fix.

The operative sentence for anyone trading this is about policy stance, not inflation. Warsh walked through credit spreads near the low end of their historical ranges, strong issuance, a July Senior Loan Officer Survey showing commercial and industrial lending standards on the easier end of their range, low equity volatility, and S&P 500 profits up more than 20 percent on the year. His conclusion: "Credit and loan markets are showing few signs of policy restraint," and "on balance, I would be hard pressed to describe broad financial conditions as restrictive." A Chairman saying policy is not tight, while inflation runs at 3.7 percent and the funds rate sits at 3.50-3.75, is making a hike argument in the grammar of an observation.

He closed the employment half of the mandate off entirely. The jobless rate at 4.1 percent, claims on a four-week average "near their lowest level in decades" — a direct reference to yesterday's 205,500 — and low turnover explained as post-pandemic rematching rather than weakness. When labor supply is barely growing, he argued, low monthly job gains are arithmetic rather than distress. His verdict: "I believe the labor markets are consistent with full employment." That removes the employment-mandate argument for easing, and he said so plainly: "the Fed's predominant focus right now should be on prices."

The structural change is the forward-guidance section, and traders should care about it more than the rate signal. Warsh, who helped introduce forward guidance during the financial crisis, said the practice "has overstayed its welcome" and risks "creating ambiguity in the name of clarity." He described a hall-of-mirrors problem — if markets read the Fed and the Fed reads markets, both go blind together — and said the Fed "should not indulge a regime in which market participants are looking primarily to the Fed for their next trade." He also declined to publish a mechanical reaction function, arguing no Taylor-type rule can be relied on rigorously. What replaced it is a condition: "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do." He closed: "I stand here today committed to a discipline, not to a decision."

That is guidance stated as a test rather than a date, and it changes the trading environment. If the Chairman's steer carries less information, the data carries more. Expect wider reactions to inflation prints and narrower reactions to Fed communications — and note that the September 15-16 meeting includes a Summary of Economic Projections, whose dot plot Warsh implicitly criticized, citing a Fed working paper on how those projections anchor expectations into predictable forecast errors.

Two more things deserve recording. On artificial intelligence, Warsh called this "a hinge point in history," cited annualized token sales at the two leading labs above $100 billion, up more than 500 percent year over year, and put four-quarter growth in equipment and intangibles investment at about 9 percent, its fastest since 2021, with more than half attributable to the AI buildout. That number is the domestic-demand mirror of yesterday's trade report, where capital goods imports rose 46.9 percent year over year while domestic core capital goods orders managed 0.2 percent — the investment is real, and a great deal of it is arriving from abroad and landing in wholesale inventories. And on institutional accountability, he said something a sitting Chairman rarely says: "The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs." Sixty-five months back-dates the episode to roughly March 2021.

The market's verdict was immediate and unusually coherent. The two-year yield jumped more than 6 basis points to 4.298 percent while the thirty-year fell 2 basis points to 5.168 percent and the ten-year barely moved at 4.676 percent — a bear flattener. BMO's US rates strategist Vail Hartman called it "a deliberately hawkish speech that will put to rest any concerns about the Fed's willingness to raise rates to restore price stability." Note what that curve shape actually says: the market accepted more tightening now in exchange for less inflation later. With the two-year roughly 67 basis points above the midpoint of the funds target, traders are pricing hikes. Equities eased. Warsh had claimed in the speech that market prices show confidence the Fed will deliver price stability, adding "and I can assure you . . . they're right." The curve's response was the market agreeing with him in the only language it has.

The Numbers He Gave

Inflation, from his own assessment:

Measure · Reading · Context he attached

PCE price index, 12-month change · 3.7 percent · Well above the 2 percent target

PCE price index, 6-month change · 4.1 percent · Above the 12-month rate, meaning the recent pace is faster

Share of 199 PCE components above 3 percent, 12 months · 54 percent · Against a 32 percent average in the two pre-pandemic decades

Share of 199 PCE components above 3 percent, 6 months · 49 percent · Below the post-pandemic peak of roughly 77 percent, still elevated

Duration of the inflation episode · 65 months · Responsibility placed on the central bank itself

Target · 2 percent on PCE · Described as a firm, fixed target

Growth, activity and financial conditions:

Measure · Reading · Read

Investment in equipment and intangibles, four-quarter change · About 9 percent · Fastest since 2021, more than half AI-related

S&P 500 profits, past year · Up more than 20 percent · Margins elevated relative to history

Private domestic final purchases, this calendar year · Nearly 3 percent · He calls this a higher-signal measure than GDP

Real consumer spending, past four quarters · More than 2 percent · Healthy despite the shocks

Corporate bond and leveraged loan spreads · Near the low ends of historical ranges · Issuance strong

Commercial and industrial lending standards, July survey · Easier end of the historical range · Explains this year's loan growth

Equity market volatility · Low · Watching market internals across sectors

Broad financial conditions · Not describable as restrictive · The operative judgment of the speech

Labor:

Measure · Reading · Read

Unemployment rate · 4.1 percent · Low historically, little changed for a couple of years

Initial claims, four-week average · Near the lowest level in decades · He calls it an empirically robust real-time indicator

Monthly job gains · Running low · Attributed to barely-growing labor supply, not weakness

Areas of concern · Recent graduates · Named explicitly as an exception

Overall verdict · Consistent with full employment · Removes the employment case for easing

Artificial intelligence, the conference theme:

Measure · Reading

Annualized token sales, two leading labs · More than $100 billion

Change in that figure over one year · Up more than 500 percent

Share of this year's capex growth from AI · More than half

Status in the Fed's framework · A new variable, potentially a new factor of production

Task force output · Comes later, explicitly no bearing on current policy

Market reaction on the day:

Instrument · Move · Level

2-year Treasury yield · Up more than 6 basis points · 4.298 percent

10-year Treasury yield · Little changed · 4.676 percent

30-year Treasury yield · Down 2 basis points · 5.168 percent

Curve shape · Bear flattener · Near-term path repriced up, long-term inflation repriced down

Equities · Eased · Levels not confirmed at time of writing

What He Actually Said

The speech is a US government work, so it can be quoted directly. These are the lines that carry the policy content.

Theme · The line

The standard, in place of guidance · "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

Policy stance · "On balance, I would be hard pressed to describe broad financial conditions as restrictive."

Financial conditions · "Credit and loan markets are showing few signs of policy restraint."

Priority between mandates · "So the Fed's predominant focus right now should be on prices."

The summer's better data · "While this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved."

The target · "The Fed's price-stability objective of 2 percent... is a firm, fixed target."

On inflation not fixing itself · "Price stability is not self-executing, nor is inflation necessarily mean-reverting."

Labor · "I believe the labor markets are consistent with full employment."

Forward guidance · "The practice has overstayed its welcome."

Why · "Otherwise it risks creating ambiguity in the name of clarity."

The market relationship · "We should not indulge a regime in which market participants are looking primarily to the Fed for their next trade."

Who bears the cost · "The most serious harm is likely to befall those without financial assets."

Accountability · "The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs."

Expectations · "They tend to look strong and durable until they don't."

Closing · "I stand here today committed to a discipline, not to a decision."

The seven principles he laid out, compressed:

Principle · Substance

One · Interrogate reality — do not set forward-looking policy on stale data or isolated points; trends matter most

Two · Supply is never observed, only inferred, so judging the supply-demand balance is inherently imprecise

Three · The 2 percent PCE target is firm and fixed, and price stability is not self-executing

Four · The dual mandate does not work at cross-purposes, because high inflation is itself harmful to prosperity

Five · Short-term rates are the predominant tool; unconventional policy should be used sparingly, if at all

Six · Money matters — watch both central-bank money and money created by banks and the financial system

Seven · A quieter, more purposeful Fed is better able to meet its objectives, and results are the only test of credibility

Three points of substance sit underneath the rhetoric. Principle three is a direct rejection of the argument that inflation will mean-revert on its own, which is the intellectual basis for waiting. Principle four pre-empts the objection that hiking into a soft consumer breaches the employment mandate. Principle five closes off unconventional easing. Read together, the principles are a framework built to justify tightening, or at minimum to justify not cutting, and they were published before the assessment that applies them.

On inflation expectations he was careful and slightly two-handed, which matters given what landed two and a half hours earlier. He said medium-term measures "by and large, look stable," and that swaps-market inflation compensation sends a similar message. This morning's final University of Michigan survey supports him on the near horizon — year-ahead expectations were revised down to 4.0 percent from a 4.3 percent preliminary. It supports him less on the far one, where long-run expectations have now held at 3.3 percent for three consecutive months, above their entire 2024 range of 2.8 to 3.2 percent. Warsh covered the gap himself with the warning that expectations look durable until they do not, and stated flatly that it is the Fed's job to keep them anchored.

Impact on USD

• Bullish — the two-year jumped more than 6 basis points on the speech, and the near-term policy path repriced upward.
• At 4.298 percent, the two-year sits roughly 67 basis points above the midpoint of the 3.50-3.75 percent funds target, which is the market pricing hikes rather than holds.
• "I would be hard pressed to describe broad financial conditions as restrictive" is the single most dollar-positive sentence a Chairman can say with inflation at 3.7 percent.
• Declaring labor markets consistent with full employment removes the other half of the mandate as a constraint on tightening.
• The counterweight is the long end: the thirty-year fell 2 basis points, so the market is buying the credibility rather than pricing a permanently higher rate structure.

Impact on US Indices (ES / NQ / YM)

• Mixed, lean bearish — a hawkish front end against an explicitly bullish read on the capex cycle and corporate profits.
• The bearish leg is stance: describing conditions as not restrictive is a statement of intent to tighten them, which compresses multiples.
• The bullish leg is unusual and specific to NQ — the Chairman put four-quarter equipment and intangibles investment near 9 percent with more than half AI-driven, and cited token sales above $100 billion up 500-plus percent. That is a Fed endorsement of the AI capex cycle.
• He also flagged S&P 500 profits up more than 20 percent with elevated margins, and said he is watching the second derivative of capex and earnings growth — a hint that decelerating growth rates, not levels, are what would concern him.
• Housing and agriculture were named as sectors already showing strains, and the retirement of forward guidance should widen equity reactions to data prints while narrowing them around Fed speakers.

Impact on Gold

• Bearish — a hawkish repricing at the front end lifts real yields, and Warsh explicitly described expectations as anchored.
• A Chairman committing to a firm 2 percent target and stating that price stability is not self-executing is the opposite of the debasement thesis gold has been trading.
• The thirty-year falling 2 basis points is the specific problem: long-run inflation compensation moved the wrong way for the metal.
• Offsetting: the Iran conflict, commodity prices he himself flagged as bearing watching, and long-run consumer inflation expectations still stuck at 3.3 percent keep a structural floor under it.
• Conditional: if the September 11 CPI comes in hot and the six-month PCE run-rate holds above the twelve-month, the growth-scare channel can flip this back.

What To Watch

• August employment situation — Friday, September 4. FactSet consensus is +65,000. Warsh has pre-argued that low job gains reflect labor supply, so a soft print may not move him.
• August CPI — Friday, September 11. This is the first direct test of his standard, and it shares a morning with preliminary September consumer sentiment.
• The next PCE report, late September. Watch whether the six-month change stays above the twelve-month. That gap is his own stated evidence, and it is the number to track.
• FOMC decision and Summary of Economic Projections — Tuesday and Wednesday, September 15-16. The first meeting under a Chairman who has just disowned routine forward guidance, and it carries a dot plot he implicitly criticized. How the SEP is presented is itself the story.
• Commodity prices generally. He named their recent rise as something that bears watching, and this week's energy data ran tighter on every measure.
• The five Fed task forces. Recommendations come later and he was explicit they have no bearing on current policy, but they will reshape the framework.

TLDR

Jackson Hole Economic Policy Symposium, keynote by Chairman Kevin Warsh, "In Our Time" (delivered August 28):

• PCE inflation: 3.7 percent over twelve months, 4.1 percent over six — the recent run-rate is above the annual rate, and almost nobody reported it
• 54 percent of the 199 PCE components rose above 3 percent over the year, against a 32 percent pre-pandemic norm; 49 percent over six months
• "I would be hard pressed to describe broad financial conditions as restrictive" — with the funds rate at 3.50-3.75 percent, that is a hike argument phrased as an observation
• Credit spreads near historical lows, lending standards on the easier end, equity volatility low, S&P 500 profits up more than 20 percent
• Labor markets "consistent with full employment": unemployment 4.1 percent, claims near their lowest four-week average in decades
• "The Fed's predominant focus right now should be on prices"
• Routine forward guidance retired — replaced by a standard, not a date: confidence that inflation is moving to target "clearly and at sufficient speed. Otherwise, we have work to do"
• Equipment and intangibles investment up about 9 percent over four quarters, more than half AI-related; token sales above $100 billion, up 500-plus percent
• "The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank"
• Market reaction: two-year +6bp to 4.298 percent, thirty-year -2bp to 5.168 percent, ten-year flat at 4.676 — a bear flattener, with equities easing

Every wire led with "inflation is still too high." The number underneath is that PCE is running at 4.1 percent over six months against 3.7 over twelve — by the Fed's own preferred measure, the recent pace is faster than the year's. Warsh then declared financial conditions not restrictive and the labor market at full employment, which closes off both arguments against tightening. He also retired routine forward guidance, replacing the Chairman's steer with a test the data has to pass — so from here, inflation prints should move markets more and Fed speakers less. Watch for one nuance he glossed: breadth narrowed to 49 percent over six months even as the rate accelerated, which points at concentrated commodity pressure rather than broadening inflation, and that is the part a rate hike fixes least. Jobs September 4, CPI September 11, FOMC and the dot plot September 15-16.

_For informational purposes only. Not investment advice._