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. 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? 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? We will be thinking through these matters with the help of a task force on productivity and jobs. To be clear, though, their recommendations will come later and have no bearing on decisions we make in the current policy conjuncture.
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. 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. 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. 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.
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. 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. 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 biggest 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? 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. In my term as Chairman, my colleagues and I will endeavor to construct more reliable models and more robust rules to guide policy decisions. 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.
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. Second, the Federal Reserve's actions are intended to ensure that the aggregate demand side of the economy is broadly consistent with aggregate supply. 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. 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. Finally, a quieter Fed, more purposeful in its communications, is better able to meet its objectives.
For my part, today I am impressed by the overall performance of the economy, which appears to have strengthened. 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. 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. Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive. The jobless rate, at 4.1 percent, remains low by historical standards and has not changed much for a couple of years. 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. 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. So the Fed's predominant focus right now should be on prices.
The good news is that measures of inflation expectations in the medium term, by and large, look stable. The thing about market measures of inflation expectations in economic history is that they tend to look strong and durable until they don't. There is one signal nobody can miss: The responsibility for 65 months of sustained, elevated inflation sits squarely with the central bank. 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. I stand here today committed to a discipline, not to a decision.
Source: U.S. Federal Reserve (Fed), speech at the Federal Reserve Bank of Kansas City's Jackson Hole Economic Policy Symposium (Aug. 28, 2026, Jackson Hole, Wyoming)
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