Federal Reserve Chairman Waller: AI is the most profound economic transformation of my lifetime; the FOMC meetings in October and December are crucial

Federal Reserve Chairman Kevin Warsh sent mixed signals at the IMF and World Bank Annual Meetings: artificial intelligence is the most profound economic transformation he has witnessed in his lifetime, and the remaining two Fed policy meetings this year—October and December—will be critical junctures for formulating a clear policy stance.

In a fireside chat with IMF President Kristalina Georgieva in Bangkok, Thailand, Warsh stated that since the rate hike in September, the global economic trajectory has been “broadly in line” with the Fed's expectations, suggesting that the probability of the Federal Reserve standing pat at the October 28 meeting has increased. Following his comments, the US dollar dropped 0.1% against a basket of currencies, S&P 500 futures rose 0.3%; market expectations for a Fed rate hike in October quickly fell from about 27% to around 15%.

The current mainstream market expectation is as follows: the Fed will keep rates unchanged in October and raise them by another 25 basis points in December. Warsh also stressed that the Federal Reserve is clearly committed to achieving price stability, but he does not support preemptively judging the results of policy meetings, nor does he advocate telegraphing potential policy actions for the rest of the year.

Monetary Policy Path: On Hold in October, Expectations Heating Up for December Rate Hike

Warsh made it clear that since the September hike, the global economic performance has been “broadly in line” with the Fed's expectations, and this was interpreted by the market as a signal for holding rates steady in October. In September, the Federal Reserve raised the federal funds target range to 3.75%–4%, marking the first hike since July 2023.

Fed officials had already indicated in September that they planned only one more rate hike for this year. Several voting members leaned toward acting at the last meeting in December. San Francisco Fed President Mary Daly (non-voting member) told Reuters earlier this week that while another hike is "highly likely", the timing isn’t "urgent", stating, "I think we have ample time."

New York Fed President and Vice Chair John Williams, along with Vice Chair for Monetary Policy Philip Jefferson, also sent signals that the Fed could afford to be patient and wait for the right moment.

Warsh also announced the abandonment of the “forward guidance” strategy. “We just don’t do that anymore,” he said clearly in Bangkok, emphasizing that the Federal Reserve will return to a data-driven decision-making model and will no longer provide explicit guidance on the future policy path.

Inflation Pressures: Still Running Hot, Global Synchronized Tightening

Inflation data released in the US this week has raised concerns among some investors that the pace of rate hikes may accelerate. The September CPI rose 3.7% year-on-year, driven by a surge in energy prices due to the Iran war; core CPI went up from 2.4% in August to 2.6%, higher than expected. After the data was released, market bets for an October hike climbed as high as 55% at one point.

Warsh acknowledged that inflation pressures remain concerning. "It’s hard not to have these conversations with central bank governors everywhere—you find yourselves confirming each other's concerns, everyone’s talking about the sharp rise in prices," he said.

Warsh emphasized that inflation is not an issue unique to the US—most regions globally are tightening monetary policy in sync, "which means no country can hitch a free ride." He also pointed out that the Federal Reserve’s policies have spillover effects on other countries, and other nations’ policies in turn affect the US. Major central banks such as the European Central Bank have also hiked rates to tackle inflation.

Since assuming the role of Federal Reserve Chairman in May this year, Warsh has consistently made achieving the 2% inflation target his core commitment. The Federal Reserve has now failed to meet this long-term goal for over five consecutive years.

AI Assessment: Short-Term Inflation Push, Long-Term Supply-Side “Bumpy Benefits” Ahead

Warsh characterized artificial intelligence as “the most profound economic transformation of my lifetime,” and noted he is “prudent” regarding AI’s macroeconomic impact. He said that in the US, AI is already referred to as “SI”—superintelligence.

On the economic transmission path, Warsh believes AI will impact demand before supply—the AI investment boom will push up inflation in the short term, but is expected to create substantial long-term positive supply effects and “tremendous benefits” for the global economy.

However, he maintains a cautious stance about the journey. “The path from here to there will likely be a very bumpy one—bumpy in terms of our understanding of technology, bumpy in how these new technologies’ market structures will evolve, about which we really do not know,” Warsh said.

He also noted that artificial intelligence will help central banks gain confidence in their economic data interpretations and policy judgments, and will transform the real economy, though short-term impacts on employment remain uncertain.

Of note, Warsh announced that the Fed’s Productivity and Jobs Task Force will hold an in-person hearing in the San Francisco Bay Area on November 16, focusing on several issues including the economic impact of artificial intelligence.

In June this year, Warsh established five working groups composed of external experts to study key areas in monetary policy formulation, with recommendations expected to be delivered to the Fed around the end of the year. Warsh said these working groups are tasked with creating new intellectual capital and assisting the FOMC’s decision-making.