To be honest, I actually wanted to write about something else, not the new Federal Reserve Chairman Kevin Warsh. Right now, almost everyone is talking about him and his speech at the Jackson Hole Economic Symposium. What surprised me was that, compared to previous Fed chairs, his remarks had a rather limited impact on the market. I'm sure this was intentional, but what's very intriguing is that, although his statement seemed clear on the surface to various commentators, everyone interpreted it differently. It's like the old fable of the blind men and the elephant: several blind men touched the elephant's leg, trunk, and tail, arriving at completely different conclusions. Or perhaps he's imitating Greenspan—who famously said at a Senate hearing, "If what I'm saying sounds too plain to you, you've misunderstood me." Sigh, I'll still draw on my 35+ years of experience tracking the Federal Reserve to interpret Warsh's Jackson Hole speech. I don't intend to predict the future trend of interest rates themselves; I only want to assess whether Warsh is still on the right track and whether he can help the Fed regain credibility in combating inflation. Let's get to the main point. Artificial Intelligence (The Impact on Growth and Inflation) Warsh begins by discussing a topic he's particularly concerned about: artificial intelligence is having a significant impact on the economy and finance. One thing I greatly admire about this chairman is his ability to ask incisive questions. Whether he will arrive at the correct answers remains to be seen; but if the initial questions are misguided—as past Fed chairs have repeatedly done—it's almost impossible to reach the correct conclusions. His key questions are as follows: Can the application of artificial intelligence bring sustained and significant productivity gains to the entire economy? If so, when? Will the use of AI computing power tokens complement labor or compete with it? Will next-generation AI models further increase capital intensity, or will the models themselves help us find low-capital-consumption solutions? Warsh mentions Moore's Law when considering these questions. In my view, the exponential expansion of artificial intelligence has encountered numerous practical obstacles: for example, resistance to data center construction and the pressure on resources such as electricity and water due to increased computing power. However, Moore's Law, mentioned by Walsh, provides an important supplementary perspective to this dilemma: if the total computing power required for AI operations remains constant, driven by Moore's Law, its energy consumption will decrease significantly over time. Therefore, if AI wants to continue expanding its influence without causing a serious environmental burden, it only needs to moderately slow its growth rate. Of course, this will be bad news for the stock prices of listed companies in the AI sector, but it doesn't mean that AI will hit an insurmountable wall, a situation I previously thought would occur. In my view, there is another point worth considering when thinking about the impact of AI on economic growth and inflation: the current prevailing market assumption is that the impact of artificial intelligence will far exceed that of the era of the rise of the Internet, the World Wide Web, and computer technology. But data tells us that the massive computer and Internet revolution of the past few decades has not substantially boosted inflation or economic growth. Innovation is the norm, and breakthrough technological innovations are not uncommon. AI's impact needs to be an order of magnitude greater than that of the internet to leave a clear mark on macroeconomic data; if it reaches that point, we must be wary of Skynet-like risks (a concept from the Terminator science fiction series). Forward Guidance Wash incisively analyzed the constraints of forward guidance: the more forward guidance the Federal Reserve issues, the easier it is to drive itself into a dead end. This is also why he intends to abandon forward guidance. Surprisingly, few realize that his stance is actually a tribute to the terrifying pirate Roberts in *The Princess Bride*. Reporter: "What will the Fed do next?" Warsh: "No major moves." Reporter: "I need to know the answer." Warsh: "Get used to disappointment." Humility in the face of uncertainty It's somewhat unbelievable that the word "humility" could be used to describe what happened in the Eccles Building (Federal Reserve headquarters), but it's truly refreshing! "Since forward guidance isn't suitable for normal economic conditions, shouldn't the new chairman at least provide a clear response function? For example, when economic data is overheated or falls short of expectations, the market should be informed how interest rates will be adjusted. I wish our understanding of the economy were precise enough to produce a mechanical, proven standard answer—like a simple formula such as the Taylor rule—that we could strictly rely on. But at least for now, our understanding is far from that level; and the various factors crucial to monetary policy themselves change over time." During my term as chairman, my colleagues and I will strive to build more reliable economic models and design more robust policy rules to support policy decisions. However, we are aware that accurate economic forecasting remains an expectation. Geopolitics, global supply chains, and the technological landscape are all changing rapidly. Maintaining a degree of humility regarding what we can and cannot know is a wise move.” Wow. I'm truly impressed, because this is precisely the core viewpoint I've long held. Since the late 1990s, I've repeatedly elaborated on this logic in my articles. I even wrote specifically about it in my book, *Master, Stop Pretending!*: The Federal Reserve should significantly reduce its active intervention. The underlying logic is that economic statistics can only approximate the true economic situation and inherently have a large margin of error; when new data is released, it's difficult to overturn existing judgments and prove that the economy has undergone substantial changes. Therefore, the conclusion is that if the Federal Reserve wants to adjust its monetary policy away from neutral levels, it should set a high threshold and, under normal circumstances, intervene sparingly. This further enhances the credibility of the Federal Reserve! The Fed's inflation target, "Thirdly, there is no ambiguity: the Fed's 2% price stability target, as measured by the Personal Consumption Expenditures (PCE) price index, is a firm and fixed target." This statement carries immense weight, yet most people fail to grasp its significance. During Powell's tenure, the Fed first implemented Flexible Average Inflation Targeting (FAIT); then, at last year's Jackson Hole symposium, Powell announced to the world that it was abandoning the "compensation adjustment" mechanism. In essence, this means the Fed no longer has a true "target": it observes inflation but doesn't deliberately strive to achieve a specific average inflation level. Warsh's statement signals the complete end of Flexible Average Inflation Targeting. He chose a more direct approach. The Fed introduced FAIT because it realized it wasn't adept at precisely anchoring inflation. Warsh directly tore away this veil: frankly acknowledging the Fed's limited predictive capabilities. This further enhances the Fed's credibility! Short-term interest rates However, I disagree with the following statement: "Fifth point, short-term interest rates are the main policy tool for fulfilling the dual mandate." The reality is: you cannot simply create scarcity of reserves by adjusting prices; on the contrary, it is by actively creating scarcity of reserves that interest rate changes occur. If the priorities are reversed, directly adjusting interest rates instead of first adjusting the reserve size to allow interest rates to change accordingly, this is logically inverted. I initially thought Warsh understood this well, and his other statements corroborated his understanding. But this statement alone diminishes the Fed's credibility. The importance of money: " Sixth point: Money is important. This isn't exactly a fashionable view these days, but my opinion is that money is crucial to monetary policy." In contemporary academic monetary economics circles, this is almost an unpopular view. But he's right! His credibility gains another point. If the total money supply is indeed important, then the Fed's priority should be adjusting the money supply, allowing interest rates to naturally emerge; rather than the other way around, directly controlling interest rates and passively letting money growth fluctuate arbitrarily. Trying to control both simultaneously at will is virtually impossible. Regarding wages and prices , "Data shows that wage growth is in a moderate range. However, in terms of judging potential inflation, wage growth has not long been a reliable leading indicator of future inflation." This is another view that coincides with mine. In reality, it is prices that drive wage changes, not wages that drive prices. Shiller pointed out decades ago: if inflation always rises wages first and then prices, everyone would welcome inflation. But in reality, the experience of inflation is terrible: prices rise first, and if you're lucky, employers will only raise wages later to offset the cost of living. Wages do not proactively push up prices first. It is not easy to rigorously prove this conclusion with statistical data, but the burden of proof should fall on those who put forward counterintuitive views. Warsh's judgment is correct, adding another point to his credibility! The core statement at the end of the speech, "My criterion is: we must be absolutely certain that underlying inflation is falling back to the target at a clear and sufficiently fast pace. Otherwise, we still have work to do," is interpreted by many as "the Fed will raise interest rates." However, considering the context of the entire speech, this statement does not lead to the conclusion of an interest rate hike. Reducing the balance sheet is the "task to be completed." This task has not yet begun, but it should be prioritized before any minor adjustments to short-term policy rates can be discussed. Reducing the balance sheet will naturally push up market interest rates: the Federal Reserve has transformed from the largest buyer to a seller in the Treasury market, and it would be strange if market interest rates did not rise accordingly. If long-term interest rates can indeed curb inflation, then simply reducing the balance sheet can achieve policy tightening without changing policy rates. Of course, the Federal Reserve may still eventually raise policy rates. The Federal Open Market Committee (FOMC) is ultimately a collective decision-making body. Past Federal Reserve chairs have largely been able to guide the general direction of policy; however, Warsh has two real shortcomings, meaning he may need to compromise to advance policy. First, Warsh was nominated by President Trump and enjoys the president's favor. For some FOMC members, they tend to oppose any policy Warsh wants to promote, especially when the policy would harm Trump's political interests. Second, he wants to promote genuine institutional change, while rigid bureaucracies are inherently averse to change and will actively obstruct reform. It's too early to tell whether Warsh can win this game. His personnel appointments for the inflation framework working group didn't send a positive signal, but perhaps this is just a compromise he made to win over allies. For now, I'm optimistic about Warsh; I believe he has the opportunity to reform the Fed. His speech at Jackson Hole was consistent with his previous stance, which is encouraging.