How Kevin Warsh is rewiring the Fed (axios.com)

Federal Reserve chairman Kevin Warsh is attempting a high-wire act: He's trying to fundamentally rethink the central bank's approach to guiding the economy, while also using its standard policy toolkit to bring down stubbornly persistent inflation. A market blowup late last month showed the perils of trying both at the same time. The big picture: Markets sold off and the economic commentariat was sharply critical of a Warsh press conference on July 29, in which he was vague about the possibility of raising interest rates to combat inflation. Some analysts saw it as evidence of a lack of commitment to quashing inflation. To Warsh allies, it was a brief bump in the road toward a more credible Fed. Warsh is trying to rewire the central bank to take greater advantage of AI to understand the economy in real time — aiming for better decision-making a couple of years down the road, while sticking to a more traditional playbook now. Zoom out: Warsh's supporters frame a couple of volatile trading days as a small price to pay for a world where markets are less dependent on central bank handholding. And the damage was short-lived, with stocks and bonds recovering in the ensuing days. Much of the confusion coming out of the press conference owed to Warsh's attempt to accomplish two goals at once. He seeks a paradigm shift in how the Fed uses AI. But those tools will take time to develop and prove themselves, while inflation has been elevated for more than five years, creating a sense of urgency to bring it back to the Fed's 2% target. Right now, the Warsh Fed is prepared to use its standard tool of raising interest rates to combat inflation, based on tried-and-true practices of analyzing government economic statistics and adjusting the federal funds rate target range. State of play: The blowup after the press conference resulted in significant part from Warsh seeming reluctant to discuss rate hikes as the Fed's go-to option. It was likely exaggerated by traders who had bet on a rate hike unwinding their positions, and by outsized moves in the thinly traded market for the longest-term Treasury bonds. Market moves since then have pointed to more confidence in the Fed's commitment to 2% inflation. Since Warsh became chairman, markets have come to expect one or two rate hikes by year-end, which aligns with an emerging majority of the Fed policy committee, pending late-summer inflation data. Goldman Sachs president John Waldron tells Axios: "I think commentators are overreacting to what he's doing, and we should give him the time and space to do what he's doing and judge the results over time." The intrigue: Warsh believes AI is a transformative technology that stands to remake the economy in ways that involve both huge long-term opportunity and risk of near-term disruption. He has told associates that before taking office, he built AI bots named "Milton" and "Tobin" that ingested the collected works of the great 20th-century economists Milton Friedman and James