Warsh: Too Many Red Flags Kevin Warsh has failed the test, and investors should pay attention now that he is Fed chairman. Meet the new boss, same as the old boss. His Jackson Hole performance, the Fed’s subsequent rate hike and yesterday’s Q&A are not isolated slips. They point to one conclusion: Warsh will not change the Federal Reserve’s reaction function. He will respond Pavlovianly to inflation headlines, prediction-market pricing and superficial strength in aggregate data. At Jackson Hole, Warsh adopted the posture of the inflation fighter. The subsequent rate hike made the message operational, despite an economy split between a narrow group of cash-rich growth sectors and interest-sensitive industries that remain under sustained pressure. Yesterday’s Q&A revealed the framework beneath that decision. Asked what had changed in his economic view, Warsh cited the Iran war and the AI capital-expenditure boom. His suggestion that AI capex itself is an inflation concern was the most revealing part. AI spending on data centres, power generation, grids, semiconductors and networking is not another consumer-demand binge. It is productive capital formation. It may cause temporary bottlenecks in electricity, equipment and skilled labour, but its purpose is to expand supply, raise output per worker and lower unit costs. Warsh appears to see rising capex and reach reflexively for the old diagnosis: demand is excessive, policy must restrain it. He does not distinguish sufficiently between spending that consumes capacity and investment that creates it. That is a category error. His treatment of the Iran-war oil shock is worse. Warsh did not acknowledge that an oil supply shock is a tax on growth. It may raise headline prices, but it also reduces household purchasing power, squeezes corporate margins and weakens demand. The Fed cannot create oil supply, secure shipping routes or end a war with higher interest rates. Hiking into this shock risks turning a temporary price-level increase into recession. Yes, Warsh ignored basic theory and hiked into an oil price shock. Yes, Warsh believes in the shadows in Plato’s cave that we still live in the 1970s. Warsh actual views directly conflicts with Trump’s Hamiltonian strategy, which depends on directing private capital into energy abundance, advanced computing, domestic manufacturing, supply-chain resilience and defence capacity. Its purpose is to expand America’s productive base and support growth through a heavy debt burden, not to inflate consumption. A Fed chair who treats the AI buildout as inflationary while missing an oil shock’s damage to growth becomes an internal opponent of that strategy. Warsh has shown no evidence that he will challenge the Fed’s stale reaction function. He appears captive to it, following prediction markets and headline inflation rather than applying independent judgment. His Jackson Hole warning about a “hall of mirrors” now rings hollow. Warsh appears trapped inside it, confusing market theatre with monetary analysis and performance with leadership. There is a phrase for this: big hat, no cattle. Investors should not ignore the red flags. The evidence points to the same failed reaction function, another hike in October and a Fed chairman who sounds less like an independent steward of monetary policy than a game-show host performing decisiveness for the cameras.