The world’s largest economy should not be governed by outdated assumptions about how fast it is capable of growing. Kevin Warsh used his Jackson Hole address to challenge the Federal Reserve to reconsider those limits and rethink its approach to monetary policy.
Although much of the immediate attention focused on whether Warsh increased the likelihood of an interest rate increase in September, he placed a larger question before the Fed: What if artificial intelligence, accelerating business investment, and potentially greater productivity are increasing how fast America can grow without generating inflation?
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Warsh described the United States as being at a “hinge point in history.” AI could become a new factor of production. Capital is pouring into the semiconductors, energy systems, cloud capacity, and other infrastructure needed to develop and deploy it. If those investments spread throughout the economy, they could enable workers to produce more, businesses to compete more effectively, and the economy to expand its productive capacity.
The implications for monetary policy are significant. For years, economic thinking and monetary policy debates were shaped by expectations of an economy that would remain low and slow. Estimates of sustainable growth help policymakers judge when demand is exceeding productive capacity and creating inflationary pressure. But assumptions shaped by expectations of weak productivity and limited investment opportunities may not accurately describe an economy being transformed by technology and capital formation.
The Fed can observe economic activity. It must estimate the productive capacity available to meet that demand. If productivity is rising and capacity is expanding, stronger growth does not necessarily represent overheating. It may reflect an economy capable of producing more without generating the same inflationary pressure.
Getting that judgment wrong would impose real costs. If the Fed underestimates America’s productive capacity, it could restrain the investment, innovation, and hiring that are expanding that capacity. The result would not simply be higher borrowing costs. It could mean less equipment, fewer new facilities, slower housing construction, weaker productivity growth, and fewer opportunities for workers to move into better-paying jobs.
The Fed must not impose an artificial speed limit on American growth simply because yesterday’s models cannot fully explain today’s economy.
That is why Warsh’s closing declaration matters: “I am committed to a discipline, not to a decision.”
That discipline begins with intellectual humility. Economic models cannot fully capture an economy being reshaped by AI, changing supply chains, geopolitical disruption, and new patterns of investment. Warsh called on the Fed to use relevant, current, and actionable evidence, examine trends rather than isolated data points, and test its assumptions against changing economic conditions.
He also challenged the Fed’s reliance on forward guidance. When the central bank continually signals its next move, markets can become dependent on those signals. If the Fed then relies on market prices to interpret the economy, both can become trapped in what Warsh called a “hall-of-mirrors problem.” Markets begin responding to the Fed while the Fed begins responding to market reactions it helped create.
A more disciplined Fed would establish its objectives, evaluate the full body of evidence, and preserve its freedom to make the right decision when the time comes. Markets would be expected to evaluate economic conditions independently rather than depend on the central bank to prepare them for every move.
None of this weakens the Fed’s responsibility to deliver price stability. Warsh reaffirmed the 2% inflation target and acknowledged the central bank’s responsibility for the sustained inflation of recent years. Inflation remains above target, progress has been modest, and expectations must remain anchored.
But price stability and stronger growth are not inherently in conflict. Productive investment expands supply. Greater productivity helps businesses manage costs, raise wages, and increase output. A more capable economy can support employment and price stability together.
That is the balance Warsh must now maintain. Business investment is growing rapidly, private demand remains solid, and labor markets are stable. At the same time, inflation remains elevated, while housing and agriculture are showing strain. Those conditions do not produce an automatic decision. They demand a rigorous one.
September will provide an early test of Warsh’s discipline, but no single interest rate decision will define his leadership. The larger test will be whether the Fed can distinguish inflation from growth, speculation from productive investment, and temporary disruption from lasting economic change.
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America should not enter a new era of innovation with monetary policy governed by assumptions formed during an era of stagnation. The Federal Reserve cannot create productivity, investment, or economic growth. But it can recognize when the economy’s capacity is expanding and avoid standing in the way.
Warsh challenged the Fed to move beyond assumptions formed in a slower-growth era and reimagine how fast the American economy may now be capable of expanding. Meeting that challenge could help unlock the nation’s full economic potential and preserve America’s global economic leadership.
Dan Varroney is an economic strategist, founder and CEO of Potomac Core, and author of Rethinking Economic Growth.
