It's great to be back here in the valley

again. See so many familiar faces from

academia, from my last tour of service

and from my first hundred days, which uh

is just this weekend. I've been looking

forward to this weekend. And before I go

further, I want to thank Jeff Schmidt

and his team for the incredible

hospitality.

Everybody here is in debt to you and to

your colleagues here at the Federal

Reserve Bank of Kansas City. Uh or Jeff,

our thanks uh to you and your team. Now,

he and the other planners here have some

recreation options lined up for later

today. 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. I can sum up my hikes

with former vice chairman Don Con with

two words. I survived.

These steely marathon death marches

revealed the sign of Dawn that that I

was not ready for. But there's another

kind of hike. This one was with former

chairman Ben Bernani, another dear old

colleague. With Ben, it was a much more

leisurely pace, an easy stroll along the

wandering trails of the Rockefeller

Preserve. So before setting out today,

my recommendation is do a wellness

check.

Ask yourself, is this a cone day or a

Bernanki day?

The best thing about this gathering is

that it helps us all get out here to the

mountains and 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, as Kristen mentioned, is the

conference theme. And I believe the

public and the markets understand that

innovations in the conduct of Fed policy

will help deliver price stability

alongside full employment. So here's 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,

but please 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 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

what's happening in the economy.

So, first, I think we should try to

prepare a bit 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, including in

rooms like this, in the run-up to the

crisis of 2008 and over the decade that

followed, when economists and

policymakers were speaking of secular

stagnation, speaking of a global savings

glut, was a widely held view that an

excess of capital would sit on the

sidelines for a very long, long time

because there just wouldn't be enough

compelling investment opportunities. All

the good stuff, you'll recall, 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

borrow a a phrase a framing from my

former mentor George Schultz. To cite

the clearest example, progress in AI,

the 80-year-old name for the newest

technology,

has been faster even than its evangelist

predicted just a couple of years ago.

The potential for substantially higher

growth is on the rise. Everex expanding

pools of capital pouring into AI related

infrastructure of all sorts. A kind of

super

Moors 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 large language models at the

heart of AI. Users buy tokens to gain

access to these models.

Reports put annualized token sales for

the two leading labs alone at more than

a hundred billion dollars, an increase

of 500%

from just 12 months ago. We at the Fed,

we watch all this attentively.

We recognize that AI is a new variable,

potentially a new factor of production

that will have consequences both for the

economy and for the conduct of monetary

policy.

It opens up some major lines of inquiry.

Will the application of AI cause a

significant sustained rise in

productivity

across the economy? If so, when?

Will token usage be complimentary or

competitive to labor?

Will the next generation of AI models

demand even greater capital intensity

too? Or will the models themselves help

devise a capital light solution?

Among the other yet unknowns is the

resulting market structure.

Who gets to make the money? It's not

obvious when the where the returns on

capital will land or on what time scale

early on. How much of the surplus goes

to owners of scarce assets? the AI labs

or chip makers or energy producers or

cloud providers.

Over time, how much of that value occurs

to businesses and consumers?

And importantly, what are the

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 that

give access to these models. Might there

be a heterogeneity of tokens such that

growing sums will be paid for the access

to the best models, those at the

frontier?

Will token prices for older models fall

to the level of their marginal cost?

Well, we'll 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 rest have been very

encouraging.

To be clear though, their

recommendations will come later and have

no bearing on decisions we make in the

current policy conjunction.

But I believe that for future policy

challenges, this intellectual investment

today will leave us much better prepared

for tomorrow.

Next, let me say a word about forward

guidance and its substitutes.

As our task forces go about their work,

as you might know, I'm not waiting to

introduce innovations at the Fed to help

make us fit for purpose.

To highlight one example, I've set out

to change the form and function of the

Fed chairman's so-called forward

guidance. You might know about my

longtime discomfort with early

pronouncements of future policy

decisions.

I much prefer another path. and now

we'll make the case for it.

Transparency in communications about

future policy decisions is not an end

unto itself.

Communications must be in service to the

Fed's paramount responsibility.

And what is that? That's getting 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 crisis

past, I believe the practice has

outstayed 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

throughout 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 the

central bank and financial markets.

The markets, the excuse me, the Fed

needs clear market signals as unfiltered

as possible from market internals from

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,

a broad set of commodity prices.

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 of the financial

cycle.

At the same time, market participants

themselves

should be tracking real information

about the real economy. They should draw

their own conclusions, form their own

expectations on things like output and

employment and inflation. and they too

should stay sharply attuned to risks.

In my view, the Fed should be humble and

never naive. The Fed plays an essential

role in the economy and markets. 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, what

it called the hall of mirrors problem.

If markets rely materially on the Fed's

guidance and the Fed relies on market

prices,

we're more likely to be blinded to new

developments.

more likely to be caught unprepared

and more likely to commit errors in

policym.

Now, 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 any financial assets.

If the Fed gets inflation wrong and

judges the economy wrong, who gets the

worst of it?

Not the financial high-f flyers.

Hardworking Americans are the ones left

to deal with inflation that's too high

or jobs that suddenly appear less

secure.

So if forward guidance is ills suited to

normal times, how about the new Fed

chief commits at a meeting just like

this to some explicit reaction function?

Surely he could tell us his interest

rate path. If say the data were to come

in hot or cold. Well, I wish our

understanding of the economy were so

precise as to provide a mechanical tried

and trueue answer that s some simple

function like a tailor rule could be

rigorously relied upon. But our

knowledge just does not extend that far,

at least not yet. And other factors most

relevant to the proper conduct of

monetary policy, they 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

am not alone in noticing that forward

guidance in 2021, to cite just 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, more robust rules, and

will do this knowing that accuracy in

forecasting is still just an aspiration.

With so much changing so fast in our

geopolitics, global supply chains,

technology, it's wise to be modest about

what we can and cannot know as we sit

here today.

In the same spirit, we should receive

the full range of ideas on matters that

may inform the Fed's monetary policy

discussions.

If the aim is optimal decisionmaking,

and it should be, 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 with you some key principles

that guide my thinking on the

appropriate conduct of monetary policy

and then I'll offer my promised

assessment of the economy. So, let's

turn first to principles.

First, I've noticed in this line of

work, yesterday's news has a way of

getting mistaken for what's happening

right now.

The challenge is to know the difference.

In other words, we must interrogate

reality.

Make sure we're not setting

forwardlooking policy based on stale or

inaccurate data.

Nor should we rely on isolated data

points. Trends matter most.

The Fed's a decision-making agency.

We make choices amid uncertainty and the

data upon which we draw must be

relevant, contemporaneous,

accurate and as actionable as possible.

Second principle,

the Fed'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 aggregate demand is

imprecise.

Third principle,

there should be no misunderstanding.

The Fed's price stability objective of

2% as measured by the PCE price index is

a firm fixed target.

Let me be equally clear about another

aspect of this objective.

Price stability is not self-executing,

nor is inflation necessarily mean

reverting.

It's the Fed's job to deliver stable

prices. No excuses. Fourth principle,

the Fed also bears responsibility for

maximum employment.

Achieving both sides of our mandate over

the medium-term is not an eitheror

proposition.

I do not believe the Fed's dual mandate

works at cross purposes.

After all, high inflation itself is very

harmful to economic prosperity.

Fifth principle,

short-term interest rates are the

predominant tool to achieve the dual

mandate.

Unconventional policies to spur economic

activity may suit genuine crises of

which we all have much experience,

but they should otherwise be used

sparingly, if at all.

Sixth, money matters. I know 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 system.

It's true that financial innovations,

the subject of this conference, 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, a more purposeful Fed in

its communications

is better able to meet its objectives,

and we can be held accountable for

delivering on our remitt, the only true

test of our credibility.

To borrow a line from General Chuck

Jagger, at the moment of truth, they're

either reasons or results.

So having heard a little bit about AI

and general purpose technologies, having

heard a little bit about the next policy

conjuncture, a little bit on principles,

let's turn to the economy today. Given

those principles, how do I read the

economy? What's really going on outside

the window? It's a little ironic. There

are no windows in this room, but but

they're big ones at the Federal Reserve

and we've been using those in my first

hundred days and I expect we're going to

continue to use those in the period

right ahead of us. Now, you may have

read in the July minutes the unanimous

view of the FOMC.

Labor markets were stable, output 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 intermedating

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,

excuse me, require.

For my part today, as we sit here, I'm

impressed by the overall performance of

the economy, which appears to have

strengthened.

One indicator of strength is how well an

economy holds up under stress, how well

it holds up under shocks. On that score,

both Main Street and Wall Street have

been remarkably resilient.

Several other observations,

business capex is rising rapidly. The

four quarter change in investment in

equipment and intangibles has been

around 9%.

Its highest growth rate since 2021

and more than half of the capex growth

can likely be ascribed to the buildout

related to AI.

What about profits? For the firms in the

S&P, profits have grown more than 20%

over the past year alone. Profit margins

are quite elevated relative to history.

Overall equity and market volatility

quite low.

We're staying keenly focused on market

internals, watching performance across

sectors.

Expectations for both growth in capex

and corporate earnings are running quite

high. I continue to watch the change in

the growth rates, the second derivative,

the followon effects on asset prices,

business confidence, consumer incomes,

and spending are equally important to

gauge.

Credit spreads on corporate bonds and

leverage loans are near the low end of

their historical averages and issue

volumes this year quite strong. Looking

beyond fixed income markets to the

banking business in the July so-called

Slooh survey, banks tell us that

standards for CNI loans are on the

easier end of their historical ranges.

That helps explain their growth that

we've seen this year in these loans.

In my view, credit and loan markets are

showing few signs of policy restraint.

Now, certain sectors like housing and

agriculture are showing strains, but on

balance, I would be hardpressed to

describe broad financial conditions as

restrictive.

Real consumer spending has been healthy

despite these shocks, increasing more

than 2% over the past four quarters. If

you combine consumption with the brisk

investment we talked about earlier,

private domestic financial p purchases

have also risen. These purchases have

increased at a pace of nearly 3% or so

so far this year. That's a measure that

typically carols more signal than GDP.

The trend here too positive.

So 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%

remains low by historical standards and

hasn't changed much in a couple of

years. Unemployment claims on a 4-week

moving 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 rematching

between employers and employees that

happened uh after the post in the

post-pandemic environment.

But when labor supply is barely growing,

monthly job gains are naturally going to

run low. They're always area of concerns

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 future labor

disruptions. But as of now, I believe

the labor markets are broadly 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 one I talked about

earlier, the 12-month change in the PC

price index stands at 3.7%.

With a six-month change a little above

four, the comparable measures from the

CPI index are also elevated as are core

measures both of PCE and CPI inflation.

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.

So what's our job? The job for

policymakers is to capture underlying

trend inflation. Easier said than done.

We want to gauge whether underlying

inflation is rising, falling, or seems

to be stuck in place.

We also want to understand not just the

direction of travel but the speed.

Each of these broad inflation measures

have fallen significantly from their

highs of a few years ago but progress of

the last couple of years has been more

modest.

And while this summer's PC 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 my view, in tracking underlying

inflation, wage growth has not proven a

reliable indicator of future inflation

for a very long time.

So to try to gauge underlying inflation,

I want to tell you about a couple things

I've always looked to. I find it

instructive to disagregate the 199

individual components of the PC price

measure. Over the last 12 months, 50 po

54% of goods and services in this basket

showed price increases above 3%.

This is well below the post-pandemic

highs of about 77%,

but it remains well above the level of

32 in a couple of the decades that

preceded the pandemic.

Looking over just the last six months,

the conclusion is similar. 49% of goods

and services in the PC basket showed

price increases above 3%. Again, this is

well below the pandemic highs, but still

elevated, quite elevated.

The recent rise in overall commodity

prices also bears watching. What we need

to judge is whether the trends we see

indicate upside inflation risks.

Now, it matters too whether the

inflation readings of the past five

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's a credit to the Fed as an

institution

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, I know some economic historians

in the audience, is they all tend to

look really strong and durable until

they don't.

These expectations are not pushed around

easily and right now they are very well

anchored but they must be closely minded

and it's the Fed's job to make sure that

inflation expectations do not get

unanchored.

Now there is one signal nobody can miss.

The responsibility for 65 months of

sustained elevated inflation sits

squarely with the central bank and

that's where it belongs.

So 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. That's our

mandate and that's our charge to keep.

So I've covered quite a bit of ground in

the last 25 minutes or so. Let me see if

I can conclude this way.

I stand here today committed to a

discipline,

not 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.

For those of us, those of you that know

us, you'll know the following is true.

We take our responsibility seriously

with humility and with resolve.

We know so much depends on the 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, perhaps

now more than ever. It's a tremendous

honor to serve once again at the Federal

Reserve. I'm truly grateful for the

encouragement, good counsel, and the

warm reception I've received in my first

100 days from my colleagues. I'm also

honored and grateful for the views that

I've gotten, solicited and unsolicited,

from so many of you in this room.

for that and for your kind attention

this morning. I say thank you. Let's get

on with the rest of the program.