Warsh says Fed is focused on taming rising prices, but gives no hint about next rate hike

Federal Reserve Chairman Kevin Warsh on Friday said that the U.S. economy has “broadly” moved in the direction that the central bank expected during its last meeting in September, when it raised rates for the first time since 2023.

In the weeks since, inflation as measured by the consumer price index jumped to 3.7%. For businesses, inflation has hit even harder. That turned investors focus to Warsh’s appearance at the annual meeting of the International Monetary Fund and the World Bank for a signal about whether the Fed would hike rates in October or December.

“We made very clear we’d deliver price stability,” Warsh said Friday morning in Bangkok (Thursday night ET), a signal of his focus on inflation and that another interest rate hike is likely on the horizon.

But Warsh stuck to a familiar tone and refused to give any clear hint about how soon that might come. “We’re not in that business anymore,” he said.

However, Warsh, the head of the world’s most important central bank, spoke at length about one major economic force that is causing prices to rise across the economy.

“In the United States, we’re having a massive investment surge,” he said, referencing the seemingly ever-expanding AI boom.

“It’s probably the most important thing that’s happening in the global economy on the upside,” Warsh said. “I think it’s going to fundamentally change the conduct of monetary policy.”

A central feature of the AI boom is an expansive buildout of data centers around the country.

To fund all that building, trillion-dollar companies are spending, and borrowing, big sums for servers, memory and other components. Companies including Apple and Nintendo have raised prices for consumers as a result. “We have never seen a component price increase this much, this quickly,” Apple told NBC News in June.

Companies are also tapping the public debt markets in an unprecedented way. Data center companies and associated utility firms, chipmakers and cloud providers are expected to raise between $300 billion and $570 billion from the debt market this year, according to Vanguard. Those firms are also offering highly attractive interest rates, sometimes better than U.S. Treasury bonds.

Warsh said AI could also “change the real economy,” though he acknowledged not knowing how deeply it would impact employment.

But he projected optimism about the technology’s prospects, predicting that “it will make economies and countries that put it to good use more productive.” He said it should also generate “more wealth.”

“But the path from where we are to there is likely to be a very bumpy one,” he warned.

Warsh said a Fed task force of outside experts studying the impact of AI on the labor market would hold a public hearing on the topic in November.

“So I want you to hear from me optimism, but optimism leavened by the seriousness of purpose to the day jobs that you and I have,” Warsh remarked. “I think it’s an exciting development and it’s an innovation that I think a decade from now they’ll look back on and they’ll say this was hugely consequential.”

His comments will be closely scrutinized because they are the last from any Fed official before policymakers enter a “blackout” period on Saturday that lasts through their next interest rate meeting, which is scheduled for Oct. 27 and 28.

The price of politics

Already hammered by soaring interest rates, rising energy prices and stagnant wage growth, American consumers could get an extra dose of financial strain if the Fed raises rates again this month.

Voters are already dissatisfied with President Donald Trump’s handling of the economy, polls show, so another rate hike could add to Republicans’ headaches as they face potentially losing their congressional majorities in the midterms.

In recent weeks, Trump has tried to pull multiple policy levers to lower gas and diesel prices, which have pushed inflation higher in recent months. But none of them have yet slowed prices meaningfully.

“Starting on day one, we will end inflation and make America affordable again,” Trump said on the campaign trail in 2024. Inflation as measured by the consumer price index declined to as low as 2.3% four months into Trump’s term.

But that same month, Trump unleashed a wave of tariffs across the globe, dramatically changing the economic story.

By September, inflation breached the 3% threshold again. In February, Trump launched the war against Iran, causing one of the worst energy supply shocks in history. Inflation jumped as high as 4.1% in May, and looks to be headed back in that direction again.

Another Fed rate hike would also further undermine Trump’s yearslong pressure campaign to push the central bank to cut rates. Since Warsh took his post in May, the central bank has either held rates steady or increased them.

Trump hasn’t attacked Warsh after years of hammering former Chair Jerome Powell. But the president has started saying that the other members of the Fed’s board are “very hostile.”

“I’m relying on Kevin,” Trump told reporters in September, “but he’s got, you know, a very tough board. He’s got a board that was put there by a lot of other people, and the interest rates are too high.”

“They’re very political,” Trump said. Four of the Fed’s seven board members were appointed by Trump.

Diesel and the damage done

Economists and investors are paying close attention to so-called core inflation, which excludes volatile food and energy prices. Both reports this week showed that even this adjusted measure of price growth is running hotter than hoped for.

“Core CPI was the more significant surprise,” wrote analysts at Bank of America.

The core readings showed that skyrocketing fuel prices, particularly diesel, are trickling down. Farmers, truckers and others who keep commerce humming in the United States have to raise their prices in order to digest higher diesel costs. That, in turn, leads to price increases for consumer goods.

“The cost of diesel gets into just about everything,” KPMG chief economist Diane Swonk told NBC News in an August interview. “Everything from … running a farm … cost of food, but also everything across the economy that’s shipped gets that extra fee tacked onto it.” At the time, she described the surge in diesel fuel prices as likely “an inflationary problem for the next several months.”

Despite the challenges facing the U.S. economy, Warsh concluded on an optimistic note, saying that those should strengthen it in the long run.

“What is striking to me are two things: almost everywhere in the global economy showing resilience that I’m not sure I would have predicted five or six months ago, given what’s happening in geopolitics and hot spots around the world.”

Warsh added, “I believe, optimistically, you might think naively, at least in the U.S. we’re going to come out of this stronger, with a more durable economy, more capable of leading the world on economic growth.”