If inflation continues on its trend of staying significantly higher than the Federal Reserve’s 2% target, something will have to give.
That’s basically the ultimate message from Fed Chair Kevin Warsh’s keynote address during the annual Jackson Hole conference, the international get-together of the world’s central banks.
He compared a number of inflation measures that economists use. “None of these measures are perfect, but they all tell a similar story: Inflation is running above our 2% target. So, the Fed’s predominant focus right now should be on prices,” he said.
That is as close as he will get to warning that, should things continue on their current path, you can expect higher interest rates. Warsh has been saying that he wants to end the practice of forward guidance, which is when the Fed tips off how they’re leaning toward future actions.
“In normal times, the role of forward guidance should be limited and circumscribed,” Warsh said during his speech. “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.”
That’s fine, but not very useful. A bit of a nod to systems theory (without the math) might help.
What Warsh Changed In June
In the press conference after the FOMC’s meeting and vote on June 17, 2026, Warsh announced immediate and upcoming changes to how the Fed works, including getting rid of forward guidance, a practice started by the late Alan Greenspan.
Central banks thought that forward guidance, particularly when interest rates were very low, could provide additional market stimulus. Keeping to previous guidance seems a necessary step to retain credibility. If conditions change, there is the temptation to remain wed to the guidance, even if that is the wrong action, like when the Fed held off addressing rising inflation in 2020 and 2021. Some say that too much guidance can undermine other market-based information that is also available.
But there is another way to look at this: as a complex system.
Why System Complexity Creates A Problem
Formal systems are a way to model and understand complicated entities, whether physical, electronic, electro-mechanical, mathematical, procedural, or anything else.
In a simple way, a system is like driving a car. There are mechanisms that make the engine run, brakes work, turn signals indicate when they’re triggered, radios play, headlights go on and off.
The operation is based on receiving information and using human-directed feedback to make the car operate correctly. When drivers see bends in the road, they turn the wheel accordingly. The wheel then works with a series of mechanical and hydraulic systems that turn the front wheels, sending the car in a new direction. Approach a stoplight turning red and a driver presses on the brake pedal. A different series of mechanisms engages the brakes, slowing the turning of all the wheels until the car stops. Just one part of a bigger system.
From a systems view, the economy is a massive system, far more complicated than the most complicated machine, computer, set of business procedures, or anything made and controlled by humans. Untold factors have different degrees of influence on how the economy works.
An underlying truth of complex systems is that they need inherent feedback systems, or else they degenerate and fall apart. Typically, these parts have some balance in them and can absorb degrees of disturbance. The system shudders a bit and then gets back to normal, like a person stubbing a toe or twisting an ankle faces discomfort and difficulty walking for a while. Eventually, they stop hobbling and can easily balance their cup of coffee while walking through doors at work.
Finding The New Normal
Provide enough disruption, however, and things go haywire. The system adjusts around it, finding a new equilibrium, and proceeds as it can, like a car with a flat replaced by one of those doughnuts in the trunk. You have to drive more slowly and carefully and get a replacement quickly. Sometimes the system can return to where things were, say by changing a tire. With more complex systems, like climate change, we all have to live with new normals.
Even if he doesn’t phrase it this way, that is why Warsh doesn’t want to provide clear forward guidance on interest rates. It puts the Fed in the position of an all-knowing entity that can fix the economy
“I wish our understanding of the economy were so precise as to provide a mechanical, tried-and-true answer—that some simple function … could be rigorously relied upon,” Warsh said in his speech. “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.”
Chances seem likely that their knowledge will never extend far enough because they can never monitor, model, and control the thousands, millions, or billions of factors they would have to understand,
Whether or not you like capitalistic free-market values (understanding that absolutely free markets, with no laws or regulations, would let criminals and instability run wild), they have a point. People cannot direct something as complex as the economy. They can’t know enough, see far enough, or respond fast enough to keep things on track. The economy has its own stable rhythms. Until it doesn’t, and then there is no guarantee that anyone really knows how to set it aright.
Ultimately, that is why smart policymakers don’t try to micromanage economic systems.
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