Washington (CNN) — Federal Reserve Chairman Kevin Warsh has been outspoken about AI and its potential economic benefits. His view on where interest rates are heading, however, is harder to pin down.
In the nine weeks since taking the helm at America’s central bank, Warsh has declined to publicly discuss what recent economic trends mean for rates, abandoning the long-held practice of providing “forward guidance.” He reinforced that approach last week after the Fed’s latest decision to hold its benchmark lending rate steady for the fifth consecutive time, saying it’s been “a change for the better.”
Warsh has been much more forthcoming about AI. He said robust business investment, much of it driven by demand for AI infrastructure, “is preparing the ground for future growth.” He has also argued that AI could boost productivity and even lower inflation, which would give the Fed room to cut rates.
By repeatedly highlighting the potential economic boom from AI, he is drawing attention to a development that would strengthen the case for cutting rates.
“He is intently obfuscative,” said Thierry Wizman, global FX and rates strategist at Macquarie Group. “The only semi-clear opinion that Warsh has offered is that the supply side of the economy is likely to follow a path that improves productivity, presumably on AI-oriented investment, and that this will be disinflationary.”
The Fed declined to comment to CNN.
The argument for rate cuts
Warsh has been a reliable cheerleader of AI’s advancement and its potential to unleash a productivity boom. He has not only talked it up, but he has made one of his five task forces explore that same topic.
“The productivity task force is focused very much on AI and how that could be disinflationary,” said Derek Tang, a policy economist at Monetary Policy Analytics.
“It does seem that Warsh wants to keep that hope alive that productivity will be a convincing story to lower rates,” he added.
Productivity growth increases the economy’s capacity to produce goods and services. If companies can make more without significantly increasing their costs, then the economy can meet demand without pushing up prices, thus reducing inflation pressures.
AI’s impact on business investment is “the most striking feature of the economy right now,” Warsh said in congressional testimony last month. The result has been a supply shock — a rapid increase in supply for goods or services — “happening faster than I would have projected 18 months or two years ago.”
When asked during last month’s congressional hearing if AI gives the Fed an opportunity to cut rates, Warsh said: “I think this could be that opportunity. But I can’t say it for certain as of yet.”
Luke Tilley, chief economist at M&T Bank and Wilmington Trust, said “artificial intelligence can increase productivity in the same way that the internet revolution did, but it will probably do so over a multi-decade basis, like the internet.”
Avoiding rate hikes
Warsh appears content to let financial markets do some of the Fed’s tightening for it, which would take some pressure off central bankers to raise borrowing costs themselves.
In last week’s post-meeting press conference, Warsh noted the steep run-up in long-term interest rates, describing it as the largest-ever move between Fed meetings — evidence that financial conditions had tightened even without a change in the Fed’s benchmark rate.
“Market participants are learning to play the ball, not the referee — and market prices will continue to respond in the direction and magnitude they see fit,” Warsh said. Yields on 30-year US Treasurys reached 19-year highs in the morning after Warsh’s latest remarks, before easing slightly later in the day.
“The markets have done quite a bit,” he added.
Some analysts have questioned Warsh’s commitment to fighting inflation, especially with price increases above the central bank’s 2% target for more than four years. But Warsh argues that markets — and not just central bankers — should play a larger role in assessing the US economy and shaping financial conditions.
“Markets have made decisions because we stepped back from trying to influence,” Warsh said, adding that it’s crucial for the Fed to not get the market’s perspective “all fogged up by giving it our own forecast.”
The-CNN-Wire
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