Gold and stocks slid on the Fed's hawkish Jackson Hole talks and Trump’s Iran circus
Fed Chair Warsh sounded more hawkish than expected in his Jackson Hole speech, especially on inflation management.
Although there is theoretically policy space for a 25-50 bps hike by Jan '27, given the geopolitical reality on the ground, Warsh may wait for the Nov '26 midterm election and the Iran war trajectory before taking any policy/rate action.
Warsh may advocate no more official QTR Fed SEPs/dot-plots as per his zero forward guidance stance from 2027.
FOMC meetings may also be reduced to 6-4 from the existing 8 to avoid too much focus on Fed talks/guidance; the Fed will not spoon-feed the market.
On Friday, August 28, 2026, all focus of the market was on Fed Chair Warsh’s comments at the Jackson Hole symposium. Traditionally, almost all recent Fed chairs used the August Jackson Hole symposium speech & comments (Q&A) as an important event to indicate any significant policy change/actions for September-December. The market was already expecting tough talk by inflation hawk Warsh after his 2nd FOMC meeting on July 29. But the market was also waiting for Warsh after the US Treasury Secretary, Bessent, panicked and virtually launched a backdoor YCC. Trump & Co. is now trying to bring down higher bond yields (10Y ~4.75%, the highest since the 2007 GFC) by buying longer-dated bonds/USTs (10-30 years) and selling shorter ones (less than 10 years) in a desperate attempt to bring down bond yields on the longer end at the expense of the shorter.
The Trump administration will have to roll over almost $10T of debt at comparatively lower coupon rates. As the fiscal authority and the debt manager of the government, the US TSY has to ensure lower borrowing costs for the US government, which has been running like a ‘big Ponzi scheme’ for the last several decades. The US combined public debt is now ~$46T, including federal debt of ~$40T and state & local governments at least $6T. The US is now paying over 18% of its core tax revenue as interest on federal public debt of over $40T. This is significantly higher than the pre-COVID average of below 10% and the pre-Trump 1.0 level of around 7%. China still pays around 7% of its combined tax revenue as interest on combined public debt. The US Federal government is now paying almost ~$1T in net interest alone on its public debt, which is bigger than the whole defense budget.
But as the monetary authority, the Fed has the dual mandate of ensuring minimum inflation (1.9-2.0%) and unemployment (~3.8%) on a durable basis without causing a hard landing (recession). At present, the average US core inflation rate (CPI + PCE) is around +3.0% against an unemployment rate of 4.3% (amid a much lower labor participation rate than in 2023-24 by 5%). Thus, the Fed has to bring down core inflation by around 100 bps and the unemployment rate by 50 bps for its dual mandate achievement of maximum employment and price stability. For this, the Fed has to keep its repo rate around neutral or slightly above neutral to restrict the demand side of the economy so that it can balance the existing constrained supply side and bring down core inflation without causing higher unemployment.
Full text of Fed Chair Warsh’s Jackson Hole speech: August 28, 2026
At “Financial Innovation: Implications for Payments and Policy,” an economic policy symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
Thank you. It's great to be here again and to see so many familiar faces. I've been looking forward to this weekend—what better place to mark my 100th day as chairman?
For the fine hospitality, everyone here is in debt to President Jeff Schmid and his colleagues at the Federal Reserve Bank of Kansas City—Jeff, our thanks to you all.
Jeff and the other planners have some recreation options lined up for later today. And I'd advise you to be very careful with your choices.
As I learned years ago, you can take two different kinds of hikes on the trails around Jackson Hole. I can sum up my hikes with former Vice Chairman Don Kohn in two words: I survived. These steely marathon death marches revealed a side of Don I wasn't ready for.
There's another kind of hike—one I associate with Chairman Ben Bernanke, my old colleague. With Ben, it's a much more leisurely pace, an easy stroll along the wandering trails at the Rockefeller Preserve.
So before setting out, do a wellness check and ask yourself, "Is this a Kohn day or a Bernanke day?"
The best thing about this gathering is that it helps us all clear our minds and think straight about our world and our time. For me, it feels like the right place and the right audience for a real engagement with the ideas that matter most.
Innovation is the conference theme, and I believe that the public and the markets—in their collective wisdom—understand that innovations in the conduct of policy at the Fed will help deliver price stability alongside full employment.
Here is a quick overview of what I'll cover in my remarks this morning. You can call it an outline . . . you can call it a trail map . . . just don't call it forward guidance.
First, I'll touch on a few of the longer-term questions we're asking at the Fed about the latest general-purpose technology, artificial intelligence (AI), and where it might take the economy.
Then I'll reflect a bit on the practice of forward guidance and the interaction between the central bank and financial markets.
Next, I'll present some of the key principles that I believe should guide the conduct of monetary policy.
And, finally, I'll give you my assessment of the economy.
Preparing for Future Policy Conjunctures
With the unchanging picture of the Tetons as our backdrop, we are here to survey an economic landscape that is anything but static.
It wasn't so long ago—in the run-up to the crisis of 2008 and over the decade that followed—when economists and policymakers were speaking of secular stagnation and a global saving glut. It was a widely held view that an excess of capital would sit on the sidelines for a long, long time, because there just wouldn't be enough compelling investment opportunities. All the good stuff had been invented. So growth would be low and slow.
Well, times sure have changed. We've come to a hinge point in history.
To cite the clearest example, progress in artificial intelligence—the 80-year-old name for the newest technology—has been faster even than its evangelists predicted a couple of years ago.
The potential for substantially higher growth is on the rise. Ever-expanding pools of capital are pouring into AI-related infrastructure of all sorts. A kind of hyper-Moore's law seems to be playing out. Scaling laws, too, are changing both the method and speed of innovation.
Capital and labor have combined to create the large language models at the heart of AI. Users buy tokens to gain access to the models. Reports put annualized token sales for the two leading labs alone at more than $100 billion—an increase of 500-plus percent from a year ago.
The Fed watches all of this attentively. We recognize that AI is a new variable—potentially a new factor of production—that will have consequences for both the economy and the conduct of monetary policy. It opens some major lines of inquiry:
Will the application of AI cause a significant, sustained rise in productivity across the economy? And if so, when?
Will token usage be complementary or competitive to labor? Will the next generation of AI models demand even greater capital intensity, or will the models themselves help devise a capital-light solution?
Among the other unknowns is the resulting market structure. It's not obvious where the returns on capital will land or on what timescale. Early on, how much of the surplus goes to owners of scarce assets—AI labs, chipmakers, energy producers, and cloud providers?
Over time, how much of that value accrues to businesses and consumers? What are the broad implications for workers and for the employment side of the Fed's mandate?
Likewise, we don't yet know the equilibrium price of the tokens. Might there be a heterogeneity of tokens, such that growing sums will be paid for access to the best models at the frontier? Will token prices for older models fall to the level of their marginal cost?
We will be thinking through these matters with the help of a task force on productivity and jobs. My early check-ins with the leaders of that task force, and the four others, have been encouraging.
To be clear, though, their recommendations will come later and have no bearing on decisions we make in the current policy conjuncture. But I believe that for future policy challenges, this intellectual investment today will leave us far better prepared.
Forward Guidance and Its Stand-ins
As our task forces go about their work, I am not waiting to introduce innovations at the Fed to make us fit for purpose. To highlight one example, I have set out to change the form and function of the Fed Chairman's so-called forward guidance. You might know about my long-time discomfort with early pronouncements of future policy decisions. I much prefer another path . . . and will make the case for it.
Transparency in communications about future policy decisions is not a virtue unto itself. Communications must be in service to the Fed's paramount responsibility: getting monetary policy right.
Forward guidance as a regular practice was adopted by my colleagues and me during the Global Financial Crisis. It was essential at the time, and we introduced it with much fanfare. But, as with other legacies of crises past, I believe that the practice has overstayed its welcome.
In normal times, the role of forward guidance should be limited and circumscribed. Otherwise, it risks creating ambiguity in the name of clarity. Oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray. And I believe when policymakers make quasi-commitments on interest rates through the cycle, we inhibit our own freedom to make the right calls when it's time to decide.
To get policy right, we also need to get the relationship right between financial markets and the central bank. The Fed needs clear market signals, as unfiltered as possible...
from market internals...
the level and change in asset prices across sectors . . .
the prices and trading volumes of Treasury securities. . .
the foreign exchange value of the dollar . . .
the cost and availability of credit . . .
and the price of a broad set of commodities.
These and other indicators should inform the Fed's near-term outlook on economic activity and inflation throughout the business cycle.
They should also reveal the state of broader financial conditions...
and the risks and uncertainties in the financial cycle.
At the same time, market participants themselves should be tracking real information across the economy.
They should draw their own conclusions; form their own expectations of output, employment, and inflation; and stay sharply attuned to risks.
The Fed should be humble and never naïve.
The Fed plays an essential role in the economy and the markets. And our tools are powerful.
We determine the path of short-term interest rates.
And market participants will always try to anticipate what we will do next.
But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.
The economic literature has long described the distorting effects:
a hall-of-mirrors problem.
If markets rely materially on the Fed's guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments...
more likely to be caught unprepared for a turn of events...
and more likely to commit errors in policymaking.
Perversely, market participants are unlikely to bear the highest costs of the hall-of-mirrors problem.
The most serious harm is likely to befall those without financial assets.
If the Fed gets inflation wrong and judges the economy wrong, who gets the worst of it? Not the financial high-fliers. Hard-working Americans are the ones left to deal with inflation that is too high or jobs that suddenly appear less secure.
So, if forward guidance is ill-suited to normal times, then how about the new Fed chief commits—at the very least—to an explicit reaction function?
Surely, he should tell us his interest rate path—if, say, the data were to come in hot or cold.
I wish our understanding of the economy were so precise as to provide a mechanical, tried-and-true answer—that some simple function like a Taylor rule could be rigorously relied upon.
But our knowledge just doesn't extend that far—at least not yet—and the factors most relevant to the proper conduct of monetary policy change over time.
Providing forecasts to illustrate the Fed's reaction function works better in theory than in practice, better in the lab than in the field.
I'm not alone in noticing that forward guidance in 2021, to cite one example, might well have slowed the policy response to high inflation.
In my term as Chairman, my colleagues and I will endeavor to construct more reliable models and more robust rules to guide policy decisions.
We'll do this knowing that accuracy in economic forecasting is still just an aspiration. With so much changing so fast in geopolitics, global supply chains, and technology, it's wise to be modest about what we can and cannot know.
In the same spirit, we should receive the full range of ideas on matters that may inform the Fed's monetary policy decisions.
If the aim is optimal decision-making, we should not crowd out views on the economy.
How, then, to chart a better path to policy? In the balance of my remarks, I will share some key principles that guide my thinking on the appropriate conduct of monetary policy... then offer my promised assessment of the economy.
Key Principles
Turning to principles...
First, I've noticed that, in this line of work, yesterday's news has a way of getting mistaken for what is happening right now. The challenge is to know the difference. In other words, we must interrogate reality to make sure we are not setting forward-looking policy based on stale or inaccurate data. Nor should we rely on isolated data points. Trends matter most. The Fed is a decision-making agency. We make choices amid uncertainty, and the data upon which we draw must be as relevant, contemporaneous, accurate, and actionable as possible.
Second, the Federal Reserve's actions are intended to ensure that the aggregate demand side of the economy is broadly consistent with aggregate supply. However, all we observe directly is activity. We never see, and can only infer, what's really happening on the supply side. Hence, evaluating the current and expected balance between aggregate supply and demand is imprecise.
Third, there should be no misunderstanding: The Fed's price-stability objective of 2 percent, as measured by the personal consumption expenditures (PCE) price index, is a firm, fixed target. Let's be equally clear about another aspect of the objective: Price stability is not self-executing, nor is inflation necessarily mean-reverting. It is the Fed's job to deliver stable prices.
Fourth, the Fed also bears responsibility for maximum employment. Achieving both sides of our mandate over the medium term is not an either/or proposition. I do not believe that the Fed's dual mandate works at cross-purposes. After all, high inflation itself is very harmful to economic prosperity.
Fifth, short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies to spur economic activity may suit genuine crises but should otherwise be used sparingly, if at all.
Sixth, money matters. It's not fashionable these days, but my view is that money has something important to do with monetary policy. We should pay attention to money created by the central bank and money that comes from the banking and financial systems. It's true that financial innovations and other factors alter the mechanics that link the monetary base, the velocity of money, and the broader economy. But that is scarcely a reason to ignore the ultimate effects of money on financial conditions and prices.
Finally, a quieter Fed, more purposeful in its communications, is better able to meet its objectives. And we can be held accountable for delivering on our remit—the only true test of our credibility. To borrow a line from General Chuck Yeager, "At the moment of truth, there are either reasons or results.”
The Economy Today
Now, given these principles, how do I read the economy today? What's really going on outside the window?
You may have read in the July minutes the unanimous view of the FOMC:
Labor markets were stable, and output was solid. But inflation remained too high. A good majority of my colleagues and I thought the wiser course was to await new information in the intermeeting period—especially given possible developments in supply chains, investment flows, and geopolitics—before deciding whether a change in interest rate policy was advisable. And we expressed our joint readiness to act as circumstances might require.
For my part, today I am impressed by the overall performance of the economy, which appears to have strengthened. One indicator of strength is how well an economy holds up to shocks.
On that score, both Main Street and Wall Street have been remarkably resilient.
Several observations:
Business capital expenditures—the seed corn of future economic growth—are rising rapidly. The four-quarter change in investment in equipment and intangibles has been around 9 percent, its highest growth rate since 2021. More than half of the cap-ex growth this year can likely be ascribed to the buildout related to AI.
For firms in the S&P 500, profits have grown by more than 20 percent over the past year. Profit margins are quite elevated, relative to history. Overall equity market volatility is low. We're staying keenly focused on market internals, watching performance across sectors.
Expectations for growth in both cap-ex and corporate earnings are running quite high. I will continue to watch the change in their growth rates, the second derivative. The follow-on effects on asset prices, business confidence, consumer income, and spending are equally important to gauge.
Credit spreads on corporate bonds and leveraged loans are near the low ends of their historical ranges, and issuance volumes in these markets have been quite strong this year.
Looking beyond fixed-income markets to the banking business, in the July Senior Loan Officer Opinion Survey on Bank Lending Practices, banks tell us that standards for commercial and industrial loans are on the easier end of their historical range. That helps explain the growth we've seen this year in those loans. Credit and loan markets are showing few signs of policy restraint.
Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive.
Real consumer spending has been healthy despite the shocks, increasing more than 2 percent over the past four quarters. Combining consumption with the brisk investment we've observed, private domestic final purchases (PDFP) have also risen. PDFP has increased at a pace of nearly 3 percent so far this calendar year. That's a measure that typically carries more signal than gross domestic product, and the trend here too is positive.
On the employment side of the Fed's dual mandate, our country is doing well. Labor markets are quite stable. The jobless rate, at 4.1 percent, remains low by historical standards and has not changed much for a couple of years. Unemployment claims, on a four-week average—an empirically robust real-time indicator—are near their lowest level in decades.
In my view, the relatively low turnover in today's labor market is partly a result of the significant re-matching between employers and employees that happened at scale in the post-pandemic environment. When labor supply is barely growing, monthly job gains are naturally going to run low. There are always areas of concern in the labor market—for example, among recent graduates. In general, though, people who want to work, by and large, are holding or finding jobs. They may well be concerned about possible future labor disruptions, but as of now, I believe the labor markets are consistent with full employment.
But on the price-stability side of our mandate, the numbers are more concerning. The Fed's preferred measure of inflation, the 12-month change in the PCE price index, stands at 3.7 percent, while the six-month change is 4.1 percent. The comparable measures from the consumer price index (CPI) are also elevated, as are the core measures of both PCE and CPI inflation. None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2 percent target. So the Fed's predominant focus right now should be on prices.
The job for policymakers is to capture underlying trend inflation—that is, the generalized change in prices in the economy, unaffected by idiosyncratic factors. We want to gauge whether underlying inflation is rising, falling, or stuck in place. We also want to understand not just the direction of travel but also the speed. Each of these broad inflation measures has fallen significantly from its 2022 heights. But progress over the past two years has been modest.
And while this summer's PCE and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.
The data also show moderate wage growth. But in tracking underlying inflation, wage growth has not proven a reliable indicator of future inflation for a very long time.
To try to gauge underlying inflation, I find it instructive to disaggregate the 199 individual components of the PCE price measure. Over the past 12 months, 54 percent of goods and services in the PCE basket showed price increases above 3 percent. This is well below the post-pandemic highs of about 77 percent, but it remains well above the level of 32 percent in the two decades that preceded the pandemic.
Looking over just the past six months, the conclusion is similar: Of goods and services in the PCE basket, 49 percent showed annualized price increases above 3 percent. Again, this is well below the post-pandemic highs but still quite elevated.
The recent rise in overall commodity prices also bears watching. What we need to judge is whether trends indicate upside inflation risks.
It matters, too, whether the inflation readings of the past five-plus years have seeped into expectations. The good news is that measures of inflation expectations in the medium term, by and large, look stable. And inflation compensation measures from the swaps market send a strong and similar message.
Especially in light of recent developments, it is a credit to the Fed as an institution—and consistent with the best of the Fed's traditions—that market prices show confidence that we will deliver price stability. And I can assure you . . . they're right.
The thing about market measures of inflation expectations in economic history is that they tend to look strong and durable until they don't. Those expectations are not pushed around easily, and right now they are well anchored. But they must be closely monitored. It's the Fed's job to make sure that inflation expectations do not get unanchored.
There is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. And that is where it belongs.
Here is my standard: 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.
Conclusion
I stand here today committed to a discipline, not to a decision.
My Fed colleagues and I are hardly the first to hold these positions in a time of great consequence. We are determined to redeem the time by doing our very best work.
We take our responsibility seriously, with humility and with resolve. So much depends on choices we make. Sound monetary policy helps households and businesses to prosper. When carried out effectively, it broadens and deepens the momentum of our economy . . . and helps to secure America's leadership in the world. And I know that our country needs us to think carefully and act wisely.
It is a tremendous honor to serve once again at the Federal Reserve. I am truly grateful for the encouragement and good counsel I've received from my colleagues. And from so many of you in this room. For that, and for your kind attention this morning, I thank you.
Overall Analysis/Emphasis of Warsh’s Jackson Hole Speech
Innovation: The Fed has to be innovative in planning future monetary policy in the AI economy
AI-led productivity growth: The Fed has to consider AI-led productivity growth, its potential impact on CAPEX, fiscal stimulus, and the labor market.
Establishment: Established five new task forces, including a dedicated Task Force on AI Productivity and Jobs.
Purpose: These groups are designed as an intellectual investment to help the Fed anticipate future economic variables, though their forthcoming recommendations will not impact immediate interest rate choices.
AI Assessment: He identified artificial intelligence (AI) as a potential new factor of production, noting that annualized token sales for the two leading AI labs jumped over 500% in a year to top $100 billion.
Primary normal policy tool: Interest rate
Exigency additional policy tool: Balance sheet (QE/QT) ─ only under exceptional/unanticipated financial crises like the 2008 GFC, 2020 COVID, etc.
Stance on Forward Guidance: Not under normal financial conditions, but may be considered under an exceptional financial crisis (like the 2008 GFC, 2020 COVID, etc.)
Overstayed Welcome: Warsh explicitly stated that the practice of giving forward guidance has overstayed its welcome and should be strictly limited and circumscribed during normal economic times.
Freedom of Action: Warsh argues that oversharing policy deliberations or offering interest rate commitments ultimately restricts the central bank's freedom to make the correct, data-driven decisions when the time comes.
The Hall of Mirrors: Warsh warned against a regime where the Fed and the markets constantly react to each other, stating this reliance blinds both parties to real-world economic developments.
Inflation/Price stability mandate: The Fed is sacrosanct about its 2% inflation target; the present trend of underlying core inflation and also total inflation is quite higher than the target.
Elevated Inflation: The Fed’s preferred measure, the 12-month change in the PCE price index, is currently at 3.7%, while the shorter-term 6-month change is even higher at 4.1%.
PCE Basket Pressure: Highlighting sticky prices, 54% of individual goods and services in the PCE basket have experienced price increases above 3% over the past year vs 32% pre-COVID averages.
Economic Projections: Despite lingering geopolitical disruptions (Iran war), the US economy is quite resilient amid upbeat AI & other CAPEX; core GDP is growing faster than headline.
Strong Growth Factors: Business capital expenditures (CAPEX) have grown by roughly 9% over the past four quarters—largely driven by AI infrastructure buildouts—while private domestic final purchases (PDFP-core GDP) have risen at nearly a 3% pace this calendar year.
The US economy is now no longer in a stagflation-like scenario as it may have been in the pre-COVID days; AI-led investment and productivity gains have transformed it into a vibrant, hot economy.
• The Fed has to be innovative, as AI-led productivity growth may allow the Fed to run the economy a little hotter without causing higher inflation (theoretically, when overall economic productivity runs higher than economic growth, a hotter economy does not cause hotter inflation).
Stable Labor Market: The unemployment rate is holding steady at a historically low 4.1%, which Warsh considers consistent with full employment.
• The Fed will closely watch
Broader financial market & ensure financial stability along with price & employment stability
Equity market/asset price valuations (whether they are too expensive or too cheap)
Prices/volatility of USTs and their actual trading volumes, i.e., bond yield trajectories
USD levels against other major global currencies, i.e., FX rates
Overall availability of credit and borrowing costs for both businesses & households
Commodity market trajectories (like crude oil), impacting broader inflation.
Overall financial conditions, outlook, and potential risks to the outlook
The Fed will not spoon-feed the market anymore.
Market: The participants have to work hard to anticipate the Fed’s next move and their next trade.
Market participants have to do their own research/estimates about potential real GDP growth, unemployment rate, and core/total inflation rate rather than looking for the Fed’s SEPs and dot plots.
• The Fed should be humble and never naïve, as it has a powerful tool to steer the economy through its interest rate (primary policy tool).
Fed comments should not be used as an indicator for market participants for their next trade or overall trading strategy.
• The Fed is answerable to the US Congress and will ensure the interests of the hardworking American people (Main Street), not ultra-rich (high-flying) algo traders on Wall Street.
If the market is looking for the Fed’s guidance and the Fed is also looking to match market expectations, then there may be an inevitable policy error by the Fed, while both the market & Fed may find it underprepared for any potential financial crisis.
The Fed's inability to ensure price stability for the medium term will harm ordinary hard-working Americans (Real Street) much more than Wall Street’s high-flyer market players (HNIs).
• The Fed will not be merely mechanical in its policy strategy, like a simple Taylor’s rule; it will consider broader economic indicators, including the overall underlying trend of inflation and employment.
Model of economic forecasting
• The Fed will be humble & nimble in its economic forecasting and will not attempt to crowd out private/other forecasting.
Under Warsh, the Fed will ensure more robust rules and reliable economic models for economic forecasting, although 100% perfect economic analysis is still an aspiration; the overall aim is optimal decision-making.
Principles of economic forecasting
• The Fed will try to ensure forward-looking policy based on the overall trend of actual, relevant & accurate data and outlook thereof for the medium term.
As a central bank (monetary authority), the Fed will try to ensure the aggregate demand side of the economy with the supply side irrespective of fiscal authorities’ (government) politics & policies; contrary to earlier perception, the Fed has to take into consideration the present policies of the government, which may affect the supply side of the economy & its potential outlook, without active comments on the merit of such policies. For example, the Fed now has to consider the lingering supply deficit of global crude oil amid lingering uncertainty of Trump’s Iran war excursion policy and its potential medium-term adverse effect on inflation and inflation expectations.
The Fed's price stability target is 2.0% PCE inflation for the medium to longer term, and it’s the Fed's policy to ensure it at any cost. Price stability is the bedrock of any economy, and no modern economy can function properly without proper price stability. Structurally, higher inflation is also harmful for economic prosperity.
Also, without price stability, maximum inclusive employment is also not possible ─ economic growth & prosperity will remain 'K'-shaped, not the Fed’s intended ‘U’-shaped or Goldilocks in nature. The Fed will ensure its dual mandate of maximum employment and price stability, and the dual mandate is complementary to each other, not contradictory.
• The Fed will ensure its dual mandate through its primary policy tool of interest rates, while the balance sheet (QE) tool may be used only during a genuine financial crisis.
• The Fed understands the importance of its balance sheet, monetary base, and reserves for financial stability and easy/accommodative financial conditions, but will ensure proper balance sheet policy/size in normal financial conditions so that it can’t cause hotter inflation or economic activity.
Fed will be relatively quiet and focus on fulfilling its dual mandate rather than being too noisy and underperforming.
• The Fed will be credible only if it can achieve its dual mandate; the accountability will be solely on the Fed.
Fed’s assessment of overall economic activities
Resilient economy (despite geopolitical shocks), stable labor market, but inflation remained too high.
But despite hotter inflation, the Fed did not hike, as it’s waiting for more information on geopolitical developments (Trump’s Iran war fund), supply chain (price of oil & other commodities), and also business CAPEX (AI & manufacturing).
Upbeat business CAPEX and SPX-500 EPS/overall performance; Main Street is also quite resilient.
Overall financial conditions are easy except for housing and agriculture, which are showing slight strains.
Real consumer spending is quite healthy.
The overall employment situation is stable and near maximum employment.
Lower labor market participation (supply) may be due to transitory issues of skill mismatch in the new-age AI economy.
Overall inflation is quite elevated despite no wage-price inflation; inflation is above the Fed’s 2% target for over 65 months.
Inflation expectations for the medium term are still anchored to the Fed’s 2% price stability target.
Looking ahead, if core inflation does not go down toward the Fed’s 2% target at sufficient speed, then the Fed has no other option but to act swiftly.
Overall highlights of Fed Chair Warsh’s FOMC Presser: July 29, 2026
A Good Family Fight (healthy internal debates among FOMC participants/voters): Warsh explicitly leaned into the division, telling reporters, "I asked for a good family fight, and I got one," framing the 9–3 split as a constructive debate over how to manage multi-year inflation pressures.
Zero Forward Guidance: Warsh forcefully doubled down on eliminating forward guidance, noting that the Fed intends to be highly conservative with such definitive forward guidance. He emphasized that the central bank wants markets to react directly to incoming economic data rather than trying to guess the Fed's next move. Warsh reiterated that there should always be some elements of ‘uncertainty’ in the Fed’s next action rather than too much certainty, and every meeting will be ‘live’ (rather than casual). This element of Fed policy uncertainty may be an effective passive policy tool to manage market pricing and bond yields, helping to achieve the Fed’s dual mandate of maximum employment and price stability consistently.
No "Soft" Targets: Warsh also reiterated a hawkish stance on price stability, stating there is "no soft inflation target" and indicating that the Fed will not hesitate to hike rates later in 2026 if price pressures continue climbing. Warsh emphasized the Fed’s inflation target is 2.0, or 1.9%, rather than 2.3 or 2.5%. There will be no change of goalposts under any circumstances. But the Fed is open to redefining the underlying core inflation measurement by relying not only on PCE/core PCE and total CPI/Core CPI but also on some other measures of less volatile Trimmed Mean CPI measures by various regional Feds and also some private inflation data. The Fed is waiting for the Task Force report/recommendations.
Market-Driven Tightening: Warsh pointed out that the recent run-up in market-driven bond yields is effectively doing the Fed's tightening work for it, which provided the committee some comfort to hold steady at this meeting. Warsh virtually tried to take the entire credit for higher bond yields since mid-May ’26 as a result of hawkish Fed jawboning under his leadership (rather than other factors like the lingering Iran war, elevated oil prices, and the inevitable issuance of additional debt by the US Treasury to fund Trump’s Iran war ‘fun’).
Apart from any rate action, the market will also focus on Warsh’s potential actions/decisions on various structural issues, including:
Number of FOMC meetings: Warsh may prescribe/indicate 4-6 FOMC meetings in a calendar year from the present 8 (to be effective from 2028) in his forthcoming Jackson Hole speech.
Inflation targeting mechanism overhaul through a mix of inflation measures, including core CPI, PCE, Trimmed Means, and also some private data. Warsh may indicate these modifications through the Fed’s Jan '27 strategy document (subject to Congressional approval?).
Employment data: Apart from BLS data overhauling, Warsh may also include some private data officially.
Warsh may also justify higher economic growth along with higher productivity, resulting in lower/stable inflation and higher growth.
Various Fed officials are now also debating a flexible inflation targeting regime (like an inflation target of +2.0% with a band of +/- 1.0% on both sides (1.0%-2.0%-3.0%)) for policy flexibility. But Warsh’s recent comments indicate less flexibility here and a 2.0% - 1.9% inflation target as sacrosanct.
Similarly, the Fed may employ unemployment rate targeting of 4.0% +/- 0.5% on both sides (3.5%-4.0%-4.5%) for the ease of overall policy implementation in a systematic way rather than rushing. At present, the Fed has no numerical targets for minimum & maximum unemployment, which helps it to move the goalposts as per its evolving narrative/changing financial conditions.
Warsh may try to bring QT from 2027 to reduce the Fed’s B/S size and inflation structurally, while at the same time may reduce/exempt the regulatory limit for banks & institutions in the form of SLR (supplementary Leverage Ratio)—so that US banks & financial institutions may buy a higher amount of US bonds to keep bond yields lower. Lowering of the Fed's B/S size, i.e., less M2 (money printing), may limit fiscal stimulus in normal times (like Trump’s $1000 per newborn US baby DMAT A/C or present war stimulus from the UK to Iran or Tax cuts), and the Fed may also keep the terminal rate relatively lower than 3.0%, say at 2.5% against 2.0% inflation (the real neutral rate will be reduced from 1.00-0.75% to 0.50%).
Warsh may also review the quantum of the Fed’s B/S-ample reserve regime. Now, the Fed maintains its B/S at around 22-20% of US nominal GDP, which may be reduced to ~15%, but that may again risk another episode of REPO tantrum (like in late 2019).
Banking Regulatory Actions (Subject to Congressional approvals—difficult to get after the Nov '26 midterm election and the potential loss of Trump’s ultra-thin majority). Beyond monetary policy, the Fed’s regulatory stance is pivoting sharply toward supporting domestic economic growth and bank competitiveness:
Basel III "Endgame" Revisions: During congressional testimony, Warsh declared that final regulatory policy outcomes must strictly "be in service of the American economy." Regulators are looking to heavily revise proposed capital requirement frameworks to ensure large U.S. commercial banks remain globally competitive.
Tailored Supervision over "One-Size-Fits-All": The Fed is formalizing a more tailored supervisory approach. A recent example includes a finalized rule modifying the Community Bank Leverage Ratio (CBLR), dropping it from 9% to 8% to reduce regulatory friction for local/smaller institutions.
Crypto & Stablecoin Firewall: Warsh has explicitly drawn a hard regulatory line against bailing out digital asset frameworks. He noted that the Fed will aggressively step in to mitigate systemic risk but will actively resist launching liquidity safety nets or facilities to backstop independent stablecoin runs.
Now it seems that Warsh may advocate abolishing the Fed’s SEPs/dot-plots—the decades-old Fed concept (forward guidance) of quarterly SEPs (summary of economic projections) and potential Fed rate trajectory (dot-plots).
Conclusions
In brief, as a central bank, the Fed has to ensure 2% core or even total inflation, ensuring a soft landing (maximum or near-maximum employment irrespective of present labor market supply position). For the Fed, a ~4.0% longer-term unemployment rate is equivalent to maximum employment for the US economy, and +0.50% is the ideal real rate of interest (wrt to average core inflation); i.e., neutral monetary policy, which does not boost or restrict economic activities (demand side of the economy).
At a 3.75% Fed REPO rate and 3.0% average core inflation, the core real REPO rate is now around +0.75%. Similarly, at around 4.50% average 10Y bond yield, the core real bond yield (borrowing costs) is now around +1.50%, almost at the middle zone of the Fed's restrictive range (1.0-1.5-2.0%). Thus, although, theoretically, the Fed has the policy space of a 25-50 bps insurance hike, considering Trump’s low-interest savvy monetary policy (public stance), the reality of higher borrowing costs for the US government, and the apparent notion of transitory hotter inflation (due to the Iran war and the Strait of Hormuz deadlock), and the stable Co.Dec '26 but not solid labor market, Fed Chair Warsh & Co. may not hike rates at least till Dec '26 despite ultra-hawkish jawboning.
Although, as a central bank & monetary authority, the Fed has to act to tame even transitory hotter inflation, whatever may be the underlying reasons, irrespective of action/policy error by the Fiscal authority/government (like the Iran war or excessive fiscal stimulus). But considering the reality of the situation and political landscape, the Fed may wait for the post-Nov '26 midterm election, in which Trump is set to lose his Trifecta (majority) badly. Trump is going to be a lame-duck President after Jan '27, and Republican party/senior leaders may also ensure no Trump incumbency wave for the 2028 Presidential election.
Under such a scenario, a weaker Trump post-Nov'26 midterm election may be forced to make a deal in favor of Iran for the end of the Iran war and free reopening of the Strait of Hormuz (SOH), which will inevitably bring down oil and inflation. On the other side, a furiated/frustrated Trump & Co. may also double down on Iran after accumulating replenished munitions. In that scenario, inflation is bound to surge further, and the Fed has no other option but to hike rates in an effort to tame down demand and inflation.
Trump & Co. can’t resolve structural issues with temporary/cyclical fixes. After some knee-jerk reaction, US bond yields are bound to revert to the elevated trajectory unless Trump removes policy uncertainty like the Iran war and the SOH deadlock. Trump often mentioned and compared China in almost all of his media bytes. Trump should also look at China’s 10Y bond yield, now around +1.70%, at a multi-year low vs. the US’ +4.70%, at a multi-year high. China’s core inflation (CPI) is now around +1.00% vs. the US’ +2.70% on average; i.e., real bond yield is around +0.70% vs. +3.00% (CN vs. US).
Rather than just the construction of the White House Ballroom in line with China’s similar, but huge, state facilities, Trump should also focus on increasing the supply capacity of the US economy like China, including the creation of industrial & logistical infrastructure, so that the US can compete with the mighty #2 superpower China in terms of quality & quantity (products & services). Trump and every other US President have to focus on the domestic economy rather than constant external geopolitics and direct/indirect (proxy) wars (UKR to Iran).
Bottom line:
Most of the stuff by Warsh is old wine in new bottles, except for the intention of zero forward guidance or potentially no more quarterly Fed SEPs/dot-plots and reduced FOMC meetings from 2027 (from 8 to 6-4).
As per the US Congress, the gauge of price stability is 12-month total CPI (Y/Y); not core CPI or core PCE or even the Fed’s standard/preferred total PCE or any other trimmed mean method (TMI).
• The Fed may change/modify its preferred inflation gauge officially (like adopting an average of core PCE + CPI + TMI) to understand the underlying real trend, but the US Congress still wants to see total CPI near 2.0% targets—nothing else, as they have to convince the public about total/overall price stability. US Lawmakers/politicians can’t go to the public and convince them about core to total PCE or TMI, or even core CPI being lower than total CPI.
Overall cost of living is tied to total CPI, and what matters under the price stability mandate is to ensure that overall cost of living does not jump more than 20% in 10 years.
But post-COVID, the overall cost of living in terms of CPI increased almost 40% in the last 10 years, which is quite unusual for the US economy.
The primary reasons behind such an unusual price rise may be both excessive fiscal & monetary stimulus during COVID and, partially post-COVID: the Fed’s policy mistake & the epic tragedy of transitory higher inflation.
Also, post-COVID supply disruptions through various geopolitical events, from the UKR to the Iran war and Trump’s consistently bellicose policies from the trade/tariff war to the immigration war, all contributed to higher inflation, which now looks structural rather than cyclical.
Despite ultra-hawkish jawboning, the fine print of Warsh’s comments, considering overall ground reality, adverse geopolitical shock (transitory), his body language, and consistent pressure by Trump & Co., the Fed under Warsh may be on hold till at least Dec’26 rather than any perceived hike. But at the same time, there is a real policy space for an interest rate hike of 0.25-0.50% to keep the real neutral rate at 1.00-1.25% from the present average of +0.75% (Fed REPO rate 3.75% - 3.00% average core inflation). Thus, the Fed may also hike rates in Dec’26-Jan’27 if Trump suffers a massive loss in the Nov’26 midterm election and then doubles down on the Iran war narrative, aiming to take down the SOH/Kharge Island from Iran as a ‘decisive victory.'
On the other hand, if a weaker Trump (post-midterm election) has no other option but to opt for a face-saving exit from his Iran war mess and the SOH reopened almost fully/freely under Iran-Oman joint control, oil will plunge to pre-Iran war levels. In that scenario, the Fed—under Chair Warsh—may continue to be on hold rather than hike.
Typical Market Reactions: The Fed’s Warsh sounded more hawkish than expected, especially on inflation management.
Overall, the FOMC statement, 9-3 votes to hold, and Warsh's ‘tough talks,’ along with a lack of explicit forward guidance that no such rate hike will occur in Sep-Dec '26, triggered sharp volatility across Wall Street.
Equities, USTs Slid
Treasury/Bond Yields Spiked
USD surged, Gold slumped
Also, renewed Iran war tensions sparked the above movements more, as Trump & Co. may not be in the mood for a complete face-saving exit from the Iran war excursions. Thus, the US TSY is now panicking with the rising US bond yields, eyeing the 5% red/recession line. And the US TSY now has no option but to launch a rare backdoor YCC officially from September 9, 2026, to save the USTs (longer tenure from further plunging). Trump & Bessent’s ‘toughest secondary sanctions’ on China may not work as intended—China will not budge before Trump at gunpoint and ditch Iran for its own economic & geopolitical interests. Moreover, China may further restrict the supply of military-grade rare earth materials to the US/Trump admin, which will eventually slow down US arms/munitions production and carry on the never-ending war/proxy war in Asia and Eastern Europe (UKR war surrounding Russia) for the interest of the US military-industrial lobby.
Technical outlook: DJ-30, NQ-100, SPX-500, and Gold
Looking ahead, whatever may be the narrative, technically Dow Future (CMP: 53400) now has to sustain over 53700/54000-54200/54700 and 55000-55100 for a further rally to 55500/56000-58500/59000 in the coming days; otherwise, sustaining below 53650 may further fall to 53500/53300-53200/52900-52500/51900 and 51300/51000-50500/50200 in the coming days.
Similarly, NQ-100 Future (29375) now has to sustain over 29650/29750* for a further rally to 30000/30500*-30700/30800* for a further rally to 31000*, and only above sustaining 31050-31100 may further surge to 31200/31300-31500*/32000 and even 32400/32500 in the coming days; otherwise, sustaining below 30600 may fall to 30400/30300-30200/30000, and further 29900/29500-29100/28300*-28100/27800, it may fall to 27400-27000 and 26600/26300-26000/25600 in the coming days.
Looking at the chart, technically SPX-500 (CMP: 7700) now has to sustain over 7775 for 7800/7850-7587/7900* and a further rally to 8000/8150-8300/8500 in the coming days; otherwise, sustaining below 7750, the SPX-500 may again fall to 7700/7640*-7620/7600 and 7550/7500-7300/7200 and 7100-6900 in the coming days.
Looking ahead, whatever may be the narrative, technically Gold ($4425) now has to sustain over 4410-4395 for 4450/4480-4510/4530 and 4585*/4600-4650/4725* and 4825-4900 in the coming days; otherwise, sustaining below 4385-4375, Gold may further fall to 4350/4325 and 4295/4275*-4175/4155 and 4090/4050-4050/4000*/3970 and 3925* in the coming days.
