Interest Rates: Warsh Says Fed Will Deliver Price Stability

Federal Reserve Chair Kevin Warsh said in Bangkok on Friday, October 16, that the Fed will deliver price stability, and he gave no hint about what the central bank will do at its next meeting on October 28.

Warsh spoke in a fireside chat with IMF Managing Director Kristalina Georgieva at the IMF and World Bank annual meetings. He said central bankers everywhere are comparing notes on the same surge in prices, and that global central banks tightened policy at the same time, so there are no free riders. "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," he said, according to Reuters.

Where rates stand now

The Federal Open Market Committee raised its target range for short term rates to 3.75 percent to 4 percent last month. Warsh described that September move in his own words: the Fed "made very clear that we would deliver price stability, and we removed a dose of accommodation about a month ago." Since that meeting, September consumer price inflation came in at 3.7 percent year over year, up from 3.4 percent the month before and well above the Fed target of 2 percent. Producer prices also ran hot this week. Reuters reported that two inflation measures this week came in higher than expected and heading in the wrong direction from the Fed's 2 percent goal.

Warsh said he does not prejudge meetings and does not say in advance what he might do at the meetings left this year. Reuters noted that this silence fits the style he has kept since taking the reins as Fed chief in May. His colleagues have been less quiet. In recent weeks nearly all of them said more tightening is probably needed, but most wanted more data first to judge the inflation trend, a signal that a second hike this month was unlikely. Traders took the same message. Most now bet the Fed holds rates steady on October 28 and raises by a quarter point in December, according to CME FedWatch figures cited by USA Today.

AI is pushing prices both ways

Warsh called the artificial intelligence investment surge probably the most important thing happening in the global economy on the upside. He said the buildout can push prices up in the short term, because it raises demand for products such as memory chips, and push prices down over time, because it raises productivity. He called the path very bumpy. "It's obviously hitting the demand side of the economy before it's going to hit the supply side of the economy," he said. He said policymakers still do not know what AI will do to jobs over the next 12 to 18 months, but that countries that put AI to good use should end up more productive and wealthier.

The Fed is studying that question directly. A task force set up to advise the Fed on AI, productivity and jobs will hold a field hearing in the San Francisco Bay Area on November 16, Warsh said, in what will be a first public look at the group's work.

Stronger than expected

Reuters reported that Warsh also voiced surprise at how well the United States and other economies are holding up through energy shocks and tighter policy. He said the investment surge is broadening beyond AI into other sectors, giving the US economy tailwinds and durability that are not found everywhere. The IMF said earlier in the week that AI investment would keep global growth above 3 percent this year, partly offsetting the drag from oil prices above 100 dollars a barrel, while warning that high debt and a sharp pullback in AI investment and asset values threaten the outlook. Warsh said he believes the United States will come out of this period stronger, with a more durable economy. For borrowers, the plain read is this: no relief is promised this month, and the December meeting is the one markets now watch.