Warsh Vows No Excuses on 2 Percent Inflation

Federal Reserve Chairman Kevin Warsh used his Jackson Hole podium on Friday to draw a bright line around the central bank’s credibility, declaring that the long-promised 2 percent inflation goal on the Personal Consumption Expenditures (PCE) index is “a firm, fixed target.” Price stability, he said, “is not self-executing…it’s the Fed’s job to deliver stable prices, no excuses.” Investors took note as gold touched an intraday high near $4,612 per ounce on Thursday, a reminder that markets continue to hedge against the possibility that inflation remains well above the Fed’s comfort zone.

PCE inflation is running 3.7 percent year-over-year, with the six-month pace running above 4 percent. Even after cooling from post-pandemic peaks, 54 percent of the PCE basket has risen more than 3 percent in the past year, compared with a pre-COVID norm of 32 percent. Warsh said that the responsibility for “65 months of sustained elevated inflation” sits squarely with the central bank. Comparable Consumer Price Index data show the same stubborn pressure, a sign that price growth has not yet meaningfully improved.

Warsh called the labor market “broadly consistent with full employment.” Business investment in equipment and intangibles is advancing at a 9 percent clip, more than half of it tied to artificial-intelligence projects. S&P-listed firms have booked profit growth above 20 percent, leaving margins “quite elevated.” Corporate-bond spreads and leveraged-loan spreads trade near the low end of their historical ranges, while July’s Senior Loan Officer Survey flagged easier commercial-and-industrial loan standards.

Separately, Warsh addressed the Fed’s own communication practices. He warned that routine forward guidance can trap policymakers and market participants in a “Hall of Mirrors,” in which each side reacts to the other’s signals rather than to the underlying economy. He argued that short-term interest rates should remain the predominant tool of monetary policy, adding that balance-sheet experiments and other unconventional measures “should otherwise be used sparingly, if at all.” Referring to monetary traditions that predate quantitative easing, he said “money matters” and urged the Fed to watch the money created by both the central bank and the broader financial system.

Warsh also flagged artificial intelligence as a “new variable” that could influence productivity, noting that annualized token sales at the two leading AI labs already exceed $100 billion, an increase of more than 500 percent from a year earlier. Faster productivity could help contain prices over time, though the pace of AI-related investment has raised questions about overheating, a concern also visible in gold’s recent ascent.

Whether the Fed can tame prices without another round of unconventional policy remains to be seen. For now, investors appear to be hedging against that uncertainty by continuing to hold and buy gold, an asset that has weathered inflation and downturns for decades.