The Federal Reserve kept interest rates unchanged as expected, and Chairman Kevin Warsh held his second press conference since taking office. Three dissenting votes were cast at this meeting, bringing internal policy disagreements into the open. Warsh reiterated the Fed's commitment to the 2% inflation target and strongly advocated for the abolition of forward guidance, welcoming a market that is no longer guided by policy and relies on economic data for pricing. While US AI has driven strong growth in high-tech capital spending, multiple geopolitical shocks and tariff disruptions continue to distort inflation assessments. Warsh emphasized that the Fed's decisions will not be dictated by market expectations; the current phase is one of prudent assessment rather than passive observation. The Jackson Hole speech has not yet set a tone, and the outcome of the September policy meeting remains uncertain.

Internal power struggles emerge: a healthy debate ensued as expected, with the majority of committee members choosing to postpone interest rate hikes.

Three committee members voted dissenting, advocating for an immediate 25 basis point rate hike. Warsh stated that the "healthy internal debate" he had anticipated had materialized. Although hawkish voices increased significantly, a majority of committee members supported maintaining the current interest rate. Warsh made a key statement: this is a period of prudent assessment, not simply waiting and watching. Faced with inflation that has persisted above target levels for years, the Federal Reserve cannot expect short-term data to quickly resolve the issue; combating inflation is a long-term task, and the policy resolve will not waver.

Core reforms implemented: Gradually phasing out forward guidance and reshaping market pricing logic.

Pushing for the elimination of forward guidance was a core reform during Warsh's term. He acknowledged that the market needed a transition period to adapt to the rule changes, but firmly believed that the reform would facilitate the formulation of more scientific monetary policy. Warsh pointed out that the nominal and real interest rates along the entire US Treasury yield curve are now rising in tandem, and the market is beginning to trade autonomously based on real economic data, no longer simply waiting for officials' statements. In his view, this shift is a long-term positive. At the same time, he jokingly remarked to market participants: while they verbally demand a logical response to policy, they are essentially still craving clear predictions of the policy path.

Two main economic drivers: AI capital expenditure rebounds, while various external shocks disrupt inflation assessments.

Two major changes have dominated the recent economic landscape: First, a surge in high-tech capital expenditure, with AI-related equipment and software growing at nearly 20% annually for the past four quarters, has boosted the manufacturing sector; second, multiple shocks, including tariffs, the US-Iran conflict, and the lingering effects of COVID-19, continue to disrupt prices. The Federal Reserve will not simply ignore external shocks but will strive to uncover underlying inflation trends amidst these disturbances. The continuous external risks have significantly increased the difficulty of formulating monetary policy. Warsh reiterated his hawkish stance, stating that the 2% inflation target will not be relaxed and that achieving price stability is the core mission of the committee.

Policy Outlook: Unbound by Market Expectations, the Jackson Hole Speech Remains Uncertain

The market is currently pricing heavily in a September rate hike, but Warsh has clearly signaled independence: the Fed will not be constrained by market trading prices and will not blindly follow market expectations. The content of his speech at the Jackson Hole symposium in August has not yet been finalized, and the theme is still undetermined. The Fed will continue to refer to the research findings of its internal task force before the symposium. In the short term, the Fed has committed to continuing to hold press conferences after all policy meetings this year, while in the long term, it retains the space to adjust the press conference mechanism.

Summarize

This press conference conveyed a clear tone: hawkish forces within the Federal Reserve are growing stronger, but the current strategy is to remain on the sidelines. Warsh continues to push for reforms to forward guidance, guiding market pricing. AI investment supports economic resilience; however, multiple geopolitical and policy shocks continue to create inflation uncertainty. Although the market has widely priced in a September rate hike, the Fed retains all policy options and will not compromise with the market prematurely. Subsequent inflation and energy price data, as well as the Jackson Hole symposium speech, will be key clues for predicting the interest rate path in the fourth quarter.