Fed Chair Warsh Says AI Will Revamp Policy While Withholding October Rate Guidance

Federal Reserve Chair Kevin Warsh said artificial intelligence is going to "fundamentally change the conduct of monetary policy," speaking in Bangkok at the IMF and World Bank annual meetings on Friday local time, Thursday evening in Washington. He said the investment surge, which is broadening beyond AI itself, is "hitting the demand side of the economy before it's going to hit the supply side," adding near-term upward pressure on prices, and he called the path to higher productivity "very bumpy".

On rates he gave nothing away. "I don't prejudge meetings," Warsh said, noting that the Fed "removed a dose of accommodation about a month ago" with its September hike. He described "a synchronous tightening in monetary policy in most places around the world, and that means there's no free riders," and said the U.S. has "plenty of tailwinds that are giving some strength and durability to this economy". Reuters reported that nearly all of his colleagues have said more tightening is probably needed, but most want more data first.

Markets read the silence as leaning against an October move. Mohamed El-Erian noted that the implied probability of an October hike had fallen below 20%, against near 90% odds of a 25 basis point increase in December and about 2.5 hikes priced in by mid-2027. The federal funds target range sits at 3.75% to 4% after September's quarter-point increase, and Warsh's remarks were the last from a Fed official before the pre-meeting blackout.

The next decision comes at the October 27-28 FOMC meeting. With two inflation measures coming in hotter than expected this week, the market's December pricing rests on incoming data rather than on any guidance from the chair. The Fed's task force on AI, productivity and jobs also holds a field hearing in the San Francisco Bay Area on November 16, a venue where Warsh's view of AI as a demand shock first and a productivity gain later may get more detail.