Kevin Warsh spoke — what did we learn? With Torsten Slok

**Soumaya Keynes** (0:00)
At 8 a.m. Mountain Time on Friday, August 28th, all eyes were on Kevin Warsh, the Chairman of the US Federal Reserve.
He was opening the Jackson Hole Economic Policy Symposium, an annual gathering of VIPs in the world of monetary policy. The economic backdrop was almost as dramatic as the scenery. Bond yields at 19-year highs, inflation stubbornly above 2 percent, and a US President clearly keen to keep interest rates low. So, what happened? What did we learn from Warsh's speech? About monetary policy, the path of the US economy, and the global economy.
This is The Economics Show with Soumaya Keynes. I'm joined this week by Torsten Slok, Chief Economist at Apollo Global Management, and Asset Manager with about $1 trillion under management. And I should say that we are recording this at 5 p.m. UK time on Friday, August 28th, or 12 p.m. Eastern time US, just two hours after the Fed chair started delivering his remarks. Torsten, hello.

**Torsten Slok** (1:15)
Hello, Soumaya. Thank you so much for having me.

**Soumaya Keynes** (1:17)
Okay. So, on a scale of 1 to 10, a very precise scale, how important do you think this speech was? 10 being absolutely pivotal, 1 being completely irrelevant, and just so listeners don't switch off, please don't say 1

**Torsten Slok** (1:33)
The answer is 10
This was really, really important. He could talk about really anything in this speech, and what he decided to talk about was absolutely critical because there has been a lot of questions around what is Fed communication, what is their goal, what are their instruments. So, having more clarity about that and delivering that clarity today was absolutely critical. This was, on that scale, a very, very important speech today.

**Soumaya Keynes** (1:59)
Okay, so that was higher than I was expecting, but I appreciate your giving people an incentive to listen on. Okay, let's start with a bit more context to people who aren't as immersed in market news as you are. Why is now a tricky moment for the Fed?

**Torsten Slok** (2:15)
Because the challenge is that the Federal Reserve, just like the Bank of England, just like the ECB, they have a very clear target that inflation should be 2%.
The problem is, earlier this week, we got numbers telling us that inflation is not 2%, it's 3.5%. Obviously, it was very high during the pandemic, and it has basically continued to be above the target for a very extensive period. And the key question has been, is the Fed still required to raise interest rates to get inflation down to 2% or can they just keep interest rates where they are and wait for, popularly speaking, inflation to melt its way down to 2%?

**Soumaya Keynes** (2:53)
Okay, there's also been some drama when it comes to communications, right? So Warsh has said he wants the Fed to say less, and investors quite like being told what's going on. Whose side are you on in that debate? Do you have some sympathy with Warsh?

**Torsten Slok** (3:10)
Yeah, there are some very important nuances in that discussion, because what's being discussed exactly as you're saying, what should the Fed say?
There have been a very long period where the consensus basically argued that when interest rates are zero, it's a good idea to say we are going to keep interest rates at zero until, say, the unemployment rate reaches a certain level.
But Kevin Warsh has come in very, very strongly opinionated and said, we no longer need to give forward guidance, because if you give forward guidance, you are almost promising financial markets and the world that you are going to deliver a certain outcome in terms of what will happen to interest rates going forward. So the first answer to your question is, he has very, very clearly said, we should not be giving forward guidance. Instead, what he has been criticized for, Kevin Warsh, is that people are, of course, now saying, if you don't give forward guidance, well, what is your framework guidance? In other words, how are you thinking about monetary policy? What are your tools? Are you using interest rates? Are you using the balance sheet? Are you using tighter financial conditions? Those have very different implications for how we think about, in particular, how rates should be trading in financial markets. So the answer to your question is, when the central bank, when the Federal Reserve communicates about how it sees the economy, what it expects in the future, then it does become very important to do this distinction between forward guidance is actually not a good idea. And there, I think he has been treated unfairly because most people actually agree that forward guidance is not a good idea. But when it comes to framework guidance, most people agree that's a good idea. And this is why the pressure on him going into today was exactly to deliver that, namely what is your framework for thinking about monetary policy and interest rates?