Fed’s Warsh sees AI boosting productivity but gives no signal on next rate hike

The global economy has held up better than Kevin Warsh would have predicted earlier this year, the US central bank chief said on Friday, calling AI the biggest economic shift he had seen. ADVERTISEMENT ADVERTISEMENT Speaking in Bangkok at the annual meetings of the IMF and the World Bank, Warsh offered no clue on the Federal Reserve’s next rate decision, due on 28 October. Almost everywhere, the economy is showing a resilience "I’m not sure I would have predicted five or six months ago," Warsh said in a discussion on stage with IMF chief Kristalina Georgieva. The Fed chair was most upbeat about the US, stating during the event that a broadening investment surge that "isn’t just AI" had given the economy "plenty of tailwinds", momentum "certainly not found everywhere in the world". Energy prices have soared since the US and Israel went to war with Iran in late February. This, along with an AI investment boom, has fuelled inflation in many economies, forcing central banks to raise rates. The Fed, which has seen inflation run above its 2% target for over five years, raised rates by a quarter point to 3.75-4% in September, its first hike since July 2023. "At the Federal Reserve, we made very clear that we would deliver price stability," argued Warsh, who took over as chair in May. He said he had heard the same "resolve" from central bankers in Bangkok, calling the wave of rate hikes, including two by the European Central Bank, a "synchronous tightening" that leaves "no free riders". The IMF on Tuesday nudged upits 2026 global growth forecast to 3.1% but said risks were tilted to the downside. Rich countries also face soaring borrowing costs, with the 10-year US bond yield above 5% and the French bond yield trading around 4.8% at the time of writing. A 'bumpy' road for AI Much of Friday's discussion focused on AI, which Warsh said was "probably the most consequential change" for the US and global economies in his lifetime. Before taking office, he had argued that an AI-driven productivity boom could curb inflation and make room for lower interest rates. On Friday, he acknowledged that for now, the investment frenzy was pushing prices up by fuelling demand. Minutes of the Fed's September meeting noted that data centre construction had driven upthe cost of chips, computer equipment and electrical components. However, over time, Warsh expects AI to boost the economy’s capacity to produce, bringing a "huge benefit" at home and abroad. He also expects it to change central banking as "we torture data with old-fashioned models," he said. "Not so long from now, it won’t be torture." Despite the optimism, the Fed chair also warned that the road ahead was "likely to be a very bumpy one", both in understanding the technology and because "we really don’t know what the market structure is going to be". Eyes on the next Federal Reserve meeting Warsh, who has promised fewer hints about where policy is heading, kept to that pledge. "I don’t prejudge meetings," he said, though he noted the world had "broadly conformed" to the Fed’s expectations since September. US consumer price inflation rose to 3.7% in September from 3.4% as petrol prices surged, though core inflation, which excludes food and energy, was 2.6%. Wholesale prices rose 6.3% year on year, the most since 2022, while the economy added just 29,000 jobs last month. Bets on an October hike have swung this week, jumping from about 22% to around 50% after Wednesday’s inflation figures before falling back to about 30%, according to CME FedWatch, a tool that tracks market pricing. Markets currently put the chance of a December hike at around 90%, while the September minutes showed that most Fed officials expect another hike this year. New York Fed President John Williams, vice chair of the Fed’s committee, told Bloomberg on Tuesday that "it may be appropriate to have one more rate hike", but saw no need for more in 2027. On the other hand, Fed Governor Michelle Bowman said at the Bangkok meetings on Wednesday that she felt no urgency to act. The decision comes days before the 3 November US midterm elections. September’s hike defied US President Donald Trump’s demands for lower rates, though he still backs Warsh, his pick for the job. Friday’s remarks were among Warsh’s last before the Fed’s quiet period, which starts on Saturday and bars officials from discussing policy until after the meeting. Investors will next hear from him at his press conference after the decision.