Fed Veteran Kohn Says Warsh Learned From His 'No Guidance' Mistake

Federal Reserve Chairman Kevin Warsh delivered his inaugural Jackson Hole speech on his 100th day in the job—and opened it with a joke about hiking with former Vice Chairman Donald Kohn. The quip landed with the man it targeted. But Kohn's more consequential verdict, delivered to Fortune, concerns what Warsh corrected along the way: his refusal to discuss the economy.

What did Warsh say about Kohn?

Warsh opened his August address at the Federal Reserve Bank of Kansas City's annual conference with a story about two kinds of hikes. "I can sum up my hikes with former Vice Chairman Don Kohn in two words: I survived," Warsh said. "These steely marathon death marches revealed a side of Don I wasn't ready for."

He then contrasted Kohn with Ben Bernanke: "There's another kind of hike—one I associate with Chairman Ben Bernanke, my old colleague. With Ben, it's a much more leisurely pace, an easy stroll along the wandering trails at the Rockefeller Preserve. So before setting out, do a wellness check and ask yourself: 'Is this a Kohn day or a Bernanke day?'"

Kohn told Fortune he had been largely unaware he would feature so prominently. Warsh approached him moments before taking the stage to say he hoped Kohn didn't mind the reference—humor, Kohn believed, to break the tension.

What changed between July and August?

Kohn's sharpest criticism targets Warsh's July stance. Treasury yields rose after the July Federal Open Market Committee meeting, in part because Warsh refused to offer any forward guidance. Kohn said he was initially disappointed.

"He had such a firm view on this 'no forward guidance' that he was kind of using that to avoid talking about the economy, because he realized if he talked about the economy and inflation, people would pick up where he expected rates to go—even if he didn't say anything about where he expected rates to go," Kohn said.

Then came the turn. "That was a mistake, and he's a very smart guy—he recognized his error, and he corrected it, so I was very encouraged by the nuanced discussion," Kohn said. He added that Warsh "really owed it to the institution, to the markets, to the Congress, to his accountability, to say more, and he did it."

The August speech was hawkish on inflation, mindful of the real economy, and raised questions about artificial intelligence. Skeptics worry Warsh has too much faith in AI's promise for monetary policy. Kohn pushed back, cautiously: "He was right to say there are a bunch of questions here … I thought it was much more constructive than the way he had been talking about AI before."

How firmly held are Warsh's convictions?

Not everyone is convinced the chairman will keep adapting. Claudia Sahm, creator of the Sahm Recession Indicator, previously told Fortune she was so surprised by Warsh's definitiveness on forward guidance that she nearly "fell out of her chair." Kohn's read after six months is more forgiving: "I've been encouraged that he's learned, but I'm not surprised."

"He came in with some fixed ideas, and he has adapted as he's surveyed—as he's walked through the landscape," Kohn said. "Being inside has given him full insight into what was actually going on in the institution, and what the resources were, and how his fellow policymakers thought, what the staff was doing, what research was going on."

Were the hikes really 'death marches'?

Kohn suggests the reputation may be embellished. He recalls a trek through Paintbrush Canyon with Warsh and Mark Carney as comfortable enough for sustained conversation. "We had an extended discussion, as I remember, of inflation targets, nominal GDP targets—it was intellectual as well as physical exercise," he said.

The outings began a couple of years after the financial crisis. Warsh was then on the Fed's Board of Governors, leaving in 2011. Carney served as Governor of the Bank of Canada from 2008 to 2013 before leading the Bank of England—and later became Prime Minister of Canada. Kohn, then vice chair, was unaware his expeditions had earned the "death march" nickname among peers.

The hikes served a professional purpose, Kohn said. "The hiking … was an important chance to trade ideas, find out what's going on inside another central bank, what they're thinking about. It's a good forum for an open discussion of sometimes difficult issues."

"I guess he's adapted as he's learned—I would hope everybody would do that," Kohn said of Warsh. Whether that adaptation holds under market pressure remains the open question for the chairman's second hundred days.