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

Federal Reserve Chairman Kevin Warsh sent a dual signal at the IMF and World Bank annual meeting: artificial intelligence is the most far-reaching economic transformation of his lifetime, and the remaining two Federal Reserve meetings this year—October and December—will be critical junctures for forming clear policy judgments.

In a fireside chat in Bangkok, Thailand, with IMF President Kristalina Georgieva, Warsh stated that the global economic trajectory "generally aligns" with the Federal Reserve's expectations since the interest rate hike in September. This suggests an increased probability of maintaining the status quo at the meeting on October 28. Following his remarks, the dollar fell 0.1% against a basket of currencies, while S&P 500 futures rose 0.3%; the market's bets on a rate hike in October quickly dropped from about 27% to around 15%.

Charu Chanana, Chief Investment Strategist at Saxo Markets, stated, "Warsh's refusal to commit to another rate hike led to some Federal Reserve rate hike bets being unwound. After the strong inflation data was released, he said 'we won't pre-judge the meeting outcome,' which put pressure on the dollar."

The current mainstream expectation in the market is that the Federal Reserve will keep interest rates unchanged in October and raise them by 25 basis points again in December. Warsh also emphasized that the Federal Reserve is clearly committed to achieving price stability, but he does not support pre-judging the outcomes of meetings or advocating for advance disclosure of potential policy actions for the remaining meetings this year.

Monetary Policy Path: Hold in October, Rate Hike Expectations Heat Up in December

Warsh clearly stated that the global economic performance since the September rate hike "generally aligns" with the Federal Reserve's expectations, which the market interpreted as a signal to maintain interest rates in October. The Federal Reserve raised the target range for the federal funds rate to 3.75% to 4% in September, marking the first rate hike since July 2023.

Federal Reserve officials signaled in September that they plan to raise rates only once more this year. Several voting members expressed a preference to wait until the last meeting in December to take action. San Francisco Fed President Mary Daly (non-voting member) stated earlier this week to Reuters that while further rate hikes are "highly likely," the timing is not "urgent," adding, "I believe we have enough time."

New York Fed President and Vice President John Williams and Philip Jefferson also signaled a willingness to be patient and wait for the right moment.

Warsh also announced the abandonment of the "forward guidance" strategy. "We no longer do that," he stated clearly in Bangkok, emphasizing that the Federal Reserve will return to a data-driven decision-making model and will no longer provide clear forecasts for future policy paths.

Inflation Pressure: High Fever Persists, Global Tightening in Sync

The U.S. inflation data released 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 soaring energy prices due to the war in Iran; the core CPI increased from 2.4% in August to 2.6%, exceeding expectations. Following the data release, market bets on a rate hike in October briefly surged to 55%.

Warsh acknowledged that inflation pressure remains unsettling. "It's hard not to corroborate with central bank governors from various countries—everyone is talking about the sharp rise in prices," he said.

Warsh emphasized that inflation is not a problem unique to the United States; most regions globally are tightening monetary policy in sync, "which means no country can free ride." He also pointed out that the Federal Reserve's monetary policy will have spillover effects on other countries, and policies from other countries will similarly impact the U.S. Major central banks, including the European Central Bank, have also raised rates in response to inflation.

Since taking over as Federal Reserve Chairman in May this year, Warsh has consistently made achieving the 2% inflation target a core commitment. The Federal Reserve has not met this long-term goal for over five years.

AI Judgment: Short-Term Inflation Boost, Long-Term Supply Dividend "Rocky but Promising"

Warsh characterized artificial intelligence as "the most far-reaching economic transformation of my lifetime" and stated that he views AI's impact on the macroeconomy with a "cautious" attitude. He noted that in the U.S., artificial intelligence has been referred to as "SI" (Super Intelligence).

In terms of economic transmission, Warsh believes that the impact of AI on the demand side will manifest before the supply side shocks—AI investment booms will elevate inflation in the short term, but in the long term, it will bring significant positive supply-side shocks, creating "huge benefits" for the global economy.

However, he remains cautious about this path. "The road from here to there is likely to be a very rocky one—rocky in our understanding of technology, rocky in our uncertainty about how the market structure of these new technologies will evolve," Warsh said.

He also stated that artificial intelligence will help central banks enhance their confidence in economic data and monetary policy judgments and will change the real economy, but the short-term impact on employment remains uncertain.

Notably, Warsh announced that the Federal Reserve's productivity and employment working group will hold a field hearing on November 16 in the San Francisco Bay Area, focusing on several topics, including the economic impact of artificial intelligence.

In June of this year, Warsh established five working groups composed of external experts to study key areas of monetary policy formulation, which are expected to submit recommendations to the Federal Reserve by the end of the year. Warsh stated that these working groups are tasked with creating new intellectual capital and assisting the Federal Open Market Committee (FOMC) in decision-making.