Adam Posen Thinks Things Could Get Very 'Messy' for the Fed

In this Odd Lots podcast episode, Adam Posen, President of the Peterson Institute and former Bank of England Monetary Policy Committee member, provides a candid assessment of Fed Chair Kevin Warsh's Jackson Hole speech. Posen rates the speech a B-, noting it improved the Fed's messaging after months of confusion about policy direction, but fell short of providing clear commitments. The speech addressed several important issues: Warsh explicitly stated core PCE 2% is the target (clarifying previous ambiguity), pushed back on wage inflation as an inflation predictor, acknowledged financial conditions matter, and indicated policy has been insufficiently restrictive. However, Posen identifies a critical weakness: while Warsh listed reasons inflation might persist or increase, he didn't commit to a specific timeline or speed for bringing inflation back to target, instead using vague language about inflation heading in the "right direction at the right speed." Posen argues this preserves maximum discretion for the Chair, continuing a pattern from Warsh's hearings, press conferences, and previous remarks—a concerning approach given historical central banking norms favoring rules-based frameworks to anchor expectations. Posen compares this unfavorably to principles established by inflation-targeting pioneers like Mervyn King, emphasizing that without clear speed commitments, the Fed's statement that inflation is above target is meaningless. The transcript discusses how this discretionary approach creates "messy" scenarios: if the Fed doesn't hike despite acknowledging inflation risks, observers will question whether political pressure influenced the decision. Posen also critiques the length and philosophical sections of the speech as muddling the message when clarity was needed. On broader Fed dynamics, Posen notes Powell ended up with unusually low dissent rates during his tenure—not through malice but due to COVID-era unity concerns and protecting Fed independence during Trump attacks. He worries Warsh's rhetoric about welcoming "family fights" and debate may not reflect genuine openness to dissent, given the Chair's historical preference for preserving discretion. The conversation shifts to fiscal policy and inflation comparisons internationally. Posen acknowledges Warsh correctly identified that Powell was late hiking in 2022 and early cutting in 2023, but notes that even controlling for fiscal looseness and energy dependence, the U.S. is an inflation outlier—partly due to Biden's fiscal stimulus and lack of subsequent consolidation. He defends the criticism of Powell's tenure while noting it wasn't horrendously wrong, just wrong on labor market resilience and inflation stickiness. The discussion then turns to Fed independence and political pressure. Posen distinguishes between acceptable presidential criticism of the Fed (a historical norm under Volcker, Greenspan, Bernanke, and Yellen) and crossing lines through threats to Fed structure, removing governors, or pressuring rate cuts to ease bond sales. He emphasizes that true politicization—threatening to change Fed appointments and terms—is more dangerous than rhetorical carping. On the communications task force led by Mervyn King and Peter Fisher, Posen predicts it may be the most radical of Warsh's committees, noting both leaders have become deeply skeptical of forward guidance and forecasting in recent years. They worry markets have become too dependent on Fed signals, reducing price discovery and creating moral hazard. This represents a philosophical shift from King's inflation-targeting days toward minimal communication. The conversation addresses AI and labor market impacts. Posen notes there's currently stronger evidence of AI productivity improvements than labor market disruption, citing work by economists Jed Kolko and Eric Brynjolfsson on the "J-curve" effect—a period where humans and AI work together before displacement accelerates. He argues the "messy jobs" theory explains why job displacement hasn't appeared: most jobs contain specialized knowledge, relationships, and contextual judgment that current AI cannot easily replicate. The discussion includes concerns about economists leaving academia and think tanks for AI companies. While Posen acknowledges the legitimate case that AI is transformative and worthy of talented people's attention, he worries about independence and message distortion when well-compensated experts become company insiders advocating for permissive policies. He notes this parallels earlier tech booms but is more problematic when the work directly shapes policy positions. On GDP mismeasurement related to AI and semiconductors, Posen acknowledges the 0.3% adjustment for NVIDIA and similar companies matters for assessing true productivity gains but doesn't fundamentally change economic conclusions. Market prices already reflect NVIDIA's success, and the real productivity question depends on whether businesses transform to use AI, not just on initial technology development. Finally, on inflation outlook, Posen reiterates his earlier prediction of 3.5-4.5% inflation for the coming months with upside risks, expecting Fed hikes in September and December, raising rates 75-100 basis points over six months. He notes persistent core services inflation, upward momentum in moving averages, and geopolitical oil price risks justify hiking despite recent modest energy-driven deflation.