Federal Reserve Chairman Kevin Warsh used his first Jackson Hole speech to tell investors that inflation is still running too high, and that prices — not jobs — are now what the central bank is watching.

The 2% objective, he said, is “a firm, fixed target.”

Price stability is not self-executing, and inflation does not automatically drift back to normal on its own.

The Fed’s preferred gauge — the personal consumption expenditures price index, which tracks what Americans actually pay for goods and services — is running at 3.7% over the past twelve months, and 4.1% over the past six.

Inflation Is Not Cooling

The summer’s better-than-expected readings, Warsh said, do not show that “underlying trends have meaningfully improved.”

“The recent rise in overall commodity prices also bears watching. What we need to judge is whether trends indicate upside inflation risks,” he added.

For borrowing costs, the message was blunt. Warsh said he would struggle to call broad financial conditions restrictive. Credit spreads sit near historic lows and bank lending standards are easy.

Unemployment sits at 4.1%. Warsh called labor markets consistent with full employment, which removes the usual argument for cutting rates.

“The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank.”

Inflation expectations, he added, look durable right up until they don’t.

“The Fed’s predominant focus right now should be on prices,” Warsh said.

Warsh’s Seven Principles That Could Reshape the Fed

Warsh laid out seven principles for how the Fed should conduct monetary policy, and markets quickly picked up the implications.

First, trends matter more than individual data points. Warsh said policymakers must distinguish current conditions from stale information.

Second, the Fed must judge the balance between economic demand and supply, even though supply cannot be observed directly.

Third, the 2% PCE inflation target is fixed. Warsh said there should be no misunderstanding about that objective.

Fourth, price stability and maximum employment are not competing goals. Warsh said high inflation itself damages economic prosperity.

Fifth, short-term interest rates remain the Fed’s main policy tool. Unconventional measures should be reserved for genuine crises.

Sixth, money matters. Warsh said policymakers should pay attention to money created by the central bank and banking system.

Seventh, the Fed should communicate less and act more on incoming data. Warsh warned that excessive forward guidance can constrain policymakers when economic conditions change.

Warsh closed his speech with something closer to a promise.

“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep.”

That last point may be particularly important for markets.

How Markets Reacted

Warsh’s speech was read as hawkish by the market.

The two-year Treasury yield – the most sensitive gauge for short-term Fed interest rates – rose to 4.31% by 10:30 a.m. ET.

The dollar climbed 0.30%.

Gold – tracked by the SPDR Gold Shares (NYSE:GLD) – fell 0.94% to $4,559.79 an ounce. Bitcoin dropped 0.68% to $78,888.

Equities barely moved. The S&P 500 held at 7,739.70, up 0.07%. The Nasdaq 100 slipped 0.01% to 29,550.69, the Dow 0.06% to 53,635.45. WTI crude eased 0.24% to $82.84.

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