Fed's Warsh sees AI as positive supply shock, avoids October rate signal

Federal Reserve Chairman Kevin Warsh expressed optimism that artificial intelligence could boost productivity and wealth in economies that effectively harness the technology. However, he cautioned that the transition would be “very bumpy” and that AI’s short-term impact on employment remains uncertain.

Warsh spoke at a fireside chat with the International Monetary Fund’s managing director, Kristalina Georgieva, as part of the IMF-World Bank Annual Meetings in Bangkok on Friday.

“I want you to hear from me optimism, but optimism leavened by the seriousness of purpose,” Warsh said. A decade from now, he said, people will look back “and say this was hugely consequential.”

Warsh said the AI build-out would ultimately be a positive supply shock, which increases the economy’s capacity to produce more goods and services without necessarily pushing up prices. But he added, “On the path to that positive supply shock, we’re seeing increases in aggregate demand. That just is what it is.”

Avoids signal on October rate move

Warsh added that he wants investors to focus on the economy rather than hints from Fed officials about their next moves. The Fed raised rates by a quarter percentage point last month, to a range between 3.75% and 4%, in a unanimous vote. It was the first increase in three years, and most of Warsh’s colleagues penciled in at least one more rate increase this year in projections released at the meeting.

He said the world had “broadly conformed to our expectations” since the September meeting. He was upbeat about the economy’s prospects, saying the “massive investment surge” in the U.S. “isn’t by accident” but instead reflects good economic policy. The investment surge “isn’t just AI,” he said, and is broadening, which is giving the economy greater “strength and durability.”

Warsh, meanwhile, said little about this week’s inflation reports, and he made no apparent effort to shift investors’ expectations about the October meeting, which prior to his remarks anticipated slightly greater than a one-in-four probability of a rate increase.

Instead, he described inflation in general terms as a problem shared by many countries. Central banks’ recent responses, each made on their own terms, amounted to “a synchronous tightening in monetary policy in most places around the world,” he said, according to reports.

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