BANGKOK — Federal Reserve Chair Kevin Warsh said Friday that the surge in artificial intelligence spending should be treated as an economic shock, and he promised to keep price increases under control.
Warsh spoke on Oct. 16 at the annual meetings of the International Monetary Fund and the World Bank in Bangkok. He took part in a fireside chat with IMF Managing Director Kristalina Georgieva. He did not say what the Fed plans to do at its next meeting.
What Warsh said about AI
Warsh said a central banker’s job is to keep prices stable and employment full, and that from that seat the AI boom has to be seen as a shock. His reasoning is about timing. Money is flowing into AI right now, and it is pushing up demand before the technology adds to the economy’s capacity to supply goods and services.
In plain terms, companies are spending heavily on data centers and equipment today. That spending lifts demand and can push prices up. The productivity gains that AI is expected to bring come later.
Warsh did not turn pessimistic about the technology. He repeated that AI should eventually create more productivity and wealth. But he said the road from here to there is likely to be “very bumpy.” He also said it is not yet clear what the market for these technologies will look like, or who will end up making the money.
A shift from his earlier view
Warsh has argued for years that AI would act as a positive supply shock, one that holds inflation down and gives the Fed room to cut interest rates. That view reassured markets when President Donald Trump picked him to succeed Jerome Powell.
He took over the Fed in May. In Senate testimony in July, he said a one-time jump in prices linked to AI was real, but not necessarily inflationary, because supply would respond. He also announced five task forces that month. One of them is studying how AI affects jobs and productivity.
His remarks Friday put more weight on the near-term pressure on prices.
Other shocks hitting prices
Warsh pointed out that AI is not the only force pushing on the economy. He cited shocks from war and military conflict. The outbreak of the Iran war in February caused a historic oil supply shock and sped up price increases in many countries.
A government report this week showed inflation rose to a four-month high in September. Higher gasoline prices tied to the Middle East conflict were a major driver. One outlet reported the inflation rate at 3.7%. Inflation is now more than a percentage point above the Fed’s 2% target.
Other data released this week pointed the same way. Wholesale inflation climbed to a four-year high, and import and export prices rose at their fastest pace since 2022.
No signal on interest rates
Warsh declined to say whether the Fed will raise rates again this month. He said he does not believe in announcing now what he might do at the meetings left this year. That matches how he has handled his earlier public appearances since taking the job. He has said he plans to give less guidance on rate moves than his predecessors did.
Markets took his comments calmly. As he spoke, traders cut the odds of an October rate hike to about 17%, according to one report. The Fed held its benchmark rate at 3.5% to 3.75% in June.
Raising interest rates is the Fed’s main tool against inflation. It slows the economy and weakens demand, though the effect usually takes several months to show up.
How investors reacted
Wei Liang Chang of DBS said investors were reassured to hear Warsh repeat his belief that AI will lift productivity over the medium term. In his view, that could ease fears of back-to-back rate hikes.
What happens next
The Fed’s next policy meeting is on Oct. 28, six days before the midterm elections. Warsh has given no hint of what policymakers will decide. The central bank’s task forces, including the one on AI, are still working.
Until then, the signals will come from the economic data. The next inflation reading and any further moves in gasoline prices will show whether the pressure Warsh described is easing or building.
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