Krugman: Walsh's "what he didn't say" is more important than his "what he said".

Nobel laureate economist Paul Krugman, commenting on Federal Reserve Chairman Kevin Warsh's first speech in Jackson Hole, bluntly stated: "What's truly noteworthy in this speech is what Warsh didn't say ." In Krugman's view, Warsh's remarks were more hawkish than before, completely abandoning the previously tentatively proposed alternative inflation measures and sending no signals to any market participants expecting interest rate cuts.

In an interview with Yahoo Finance on August 29, Krugman said that Warsh's speech "sounded completely routine," offering neither hints of a policy shift nor any prelude to an interest rate cut. "If Trump wanted him to endorse a rate cut or to appear more dovish than other Federal Open Market Committee (FOMC) members, he didn't."

Krugman also pointed out what he considered an "obvious contradiction": Warsh explicitly stated in his speech that short-term interest rates are the core tool of monetary policy, and unconventional measures should only be used in special circumstances—while at the same time, Treasury Secretary Bessant was pushing forward with a long-term Treasury bond purchase program, which was essentially quantitative easing led by the Treasury. "Warsh said we're not doing that anymore, but just a few blocks away, they're doing it."

The biggest contradiction: the policy rift between the Federal Reserve and the Treasury.

Krugman believes that the most noteworthy detail in the speech is precisely the significant contradiction between Warsh's statements on monetary policy tools and the Treasury's current operations.

In his speech, Warsh clearly stated that short-term interest rates are the core tool of monetary policy, and unconventional policies are only applicable to special circumstances . However, Krugman pointed out that the long-term Treasury bond purchase program being promoted by Treasury Secretary Bessant is essentially quantitative easing implemented by the Treasury—which is exactly what Warsh called "unconventional monetary policy."

"Wash says we're not doing it anymore, but just a few blocks away, they're doing it," Krugman said. "It's a contradiction that's blatantly obvious."

He believes this policy rift will persist, especially after the Treasury announced its dual repurchase program, which has exacerbated tensions between the two agencies.

Unexpected bonus: Krugman said he "gained a normal Federal Reserve chairman".

Despite numerous concerns surrounding Warsh's appointment—including whether he would become a "loyal executor" of Trump or push for radical policy changes—Krugman said the speech's outcome was surprisingly reassuring.

"What we got is a normal Federal Reserve Chairman, which I think is good; it's exactly what we wanted."

Krugman noted that Warsh didn't even mention the issue of shrinking the Federal Reserve's balance sheet—which was once considered one of his core policy positions. "Unless I missed something, he didn't mention it at all."

Artificial Intelligence: Walsh's Agnosticism Gains Krugman's Endorsement

On the topic of artificial intelligence, Warsh's stance also tends to be conservative. He acknowledges that AI is driving investment growth and believes that concerns about long-term stagnation seem to be fading, but he refuses to make a definitive judgment on the economic impact of AI.

Krugman gave this a positive assessment. He pointed out that Walsh had previously suggested that the productivity gains brought about by AI would alleviate inflationary pressures, but he clearly toned down this assertion in this speech.

"His agnosticism is actually encouraging, and it's a wise move," Krugman admitted. On the issue of the economic impact of AI, "you can find an expert to support what you want to believe."

Hawkish Tone: Warsh Sticks to Standard Inflation Indicators

Krugman points out that in recent months, Warsh had publicly explored whether a different inflation measurement method should be used, suggesting that inflation might not be as severe as official data suggested. However, in his Jackson Hole speech, Warsh reverted entirely to the standard inflation gauge , which is currently still above the policy target.

"He stood very firmly on the standard metrics that show inflation is still above target. So this was a hawkish speech compared to his previous statements," Krugman said.

In his speech, Warsh provided several specific data points showing that he did not believe the current inflation was temporary, but rather that most categories of goods and services were experiencing excessive price increases. Krugman characterized the speech as a signal to "maintain a tight monetary policy until more improving data is seen."

Task force: Krugman believes it's nothing more than a "delaying tactic".

In his speech, Warsh mentioned the five policy task forces established within the Federal Reserve, saying progress was encouraging, but specific recommendations would be released later. Krugman did not have high expectations for this.

He cited comments made by Federal Reserve Governor Chris Waller, allegedly at a dinner, saying:

"Tell me who's in the mission team, and I can tell you what they're going to say."

Krugman argues that monetary policy is one of the most thoroughly discussed policy areas globally, stating that "these task forces are almost impossible to tell us anything we haven't heard hundreds of times," and characterizing it directly as a "move to buy time."

Canadian tariffs: Krugman warns could severely damage the US auto industry.

At the end of the interview, Krugman commented on Canada's imposition of tariffs on U.S. goods. He stated that while the tariffs are currently destructive, their scope is relatively limited; however, if the situation escalates, the consequences will not be underestimated.

"If all the tariffs Trump has threatened to impose and the retaliatory measures Canada has threatened to take effect, it will essentially destroy the American auto industry," Krugman said. He added that the current situation is still in a phase where "the absurdity outweighs the actual impact," but the future is uncertain, "and nobody knows how far it will go."

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