Fed’s Warsh sees U.S. resilience amid AI boom, mum on rate-path view

Federal Reserve Chairman Kevin Warsh voiced optimism on Friday about U.S. economic strength and surprise about how well global economies have been “hanging in there” amid continued energy shocks and tighter monetary policy to fight inflation.

He said the U.S. and many other economies were benefiting from an “investment surge” driven by artificial intelligence but broadening to other sectors that was creating a near-term demand shock that was putting upward pressure on inflation.

“I came out of meetings here yesterday and today and it’s hard to be in a discussion with central bankers and not compare notes and hear the same thing about the surge in prices,” Warsh said at the International Monetary Fund and World Bank annual meetings in Bangkok.

With inflation a “common challenge,” Warsh said global central banks undertook “a synchronous tightening in monetary policy in most places around the world, and that means there’s no free riders.”

In the U.S., he said, “We made very clear that we would deliver price stability, and we removed a dose of accommodation about a month ago,” in a reference to the Fed’s September interest-rate hike.

No preview of rate path

But in keeping with his style since taking the reins as Fed chief in May, he gave no preview about whether he feels more interest-rate hikes will be needed, or when.

“I don’t prejudge meetings,” Warsh added in the discussion with IMF managing director Kristalina Georgieva. “I don’t believe in saying now what I might do at the meetings that we have in the balance of this year.”

Warsh’s colleagues at the Fed have not been reticent on their rate-path views.

In recent weeks nearly all said they feel more tightening is probably needed, but most wanted to see more economic data in order to assess the inflation trend, a signal that they were unlikely to deliver a second rate hike this month.

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Financial markets have taken those remarks on board and are betting the Fed will wait until December to raise rates.

That remained true even after reports this week showed two different measures of inflation running higher than expected and heading in the wrong direction from the Fed’s 2-per-cent goal.

Warsh’s decision to skirt the near-term policy decision altogether and stick to broader economic themes leaves intact the expectation that the Fed will not hike this month.

‘Bumpy’ AI path to more wealth

Warsh was optimistic about the impact of AI on economic growth and productivity in the medium-term, even as he said it would be a “very bumpy” path toward what he expected would be faster productivity growth in the “real economy” that would bolster wealth.

“It’s obviously hitting the demand side of the economy before it’s going to hit the supply side of the economy,” he said. “We don’t know in the next 12 or 18 months its effect on employment, but if you believe like I believe, which is it will make economies and countries that put it to good use more productive, that it’s going to make it so that we will have more wealth, then that has to be a very good thing.”

A task force convened to advise the Fed on the impact of AI on productivity and jobs will hold a “field hearing” in the San Francisco Bay Area on Nov. 16, he said, in what will be a first public peek at the group’s work.

Emerging stronger

He said a broadening of the investment surge beyond AI was providing some resilience to U.S. growth.

“It means we’ve got plenty of tailwinds that are giving some strength and durability to this economy,” he said. “That sort of momentum is certainly not found everywhere in the world.”

But the global economy, too, was “showing resilience that I’m not sure I would have predicted five or six months ago, given what’s happening in geopolitics and hotspots around the world.”

The IMF earlier this week said that AI investment would keep global growth above 3 per cent this year, partly offsetting the drag from oil prices that are hovering above US$100 per barrel, but risks from high debt loads and a potential sharp pullback in AI investment and asset values threaten the outlook.

Warsh said that central bankers meeting in Bangkok had a common vision to safeguard price stability and were taking action to back that view, which was giving “confidence to businesses and households that’s so important for growth to continue.”

“I believe optimistically – you might think naively – at least in the United States, we’re going to come out of this stronger with a more durable economy, more capable of leading the world on economic growth,” Warsh said.