Frankfurt. According to US Federal Reserve Chairman Kevin Warsh, the boom in artificial intelligence (AI) is likely to support the economy in the United States and large parts of the world for the foreseeable future. “We are currently experiencing structural growth and a huge wave of investment,” Warsh said in Bangkok on Friday.
Warsh's appearance at the spring meeting of the International Monetary Fund (IMF) and the World Bank temporarily dispels concerns that the huge investments in AI might not pay off. The stock exchanges in Asia are extending their daily gains after a week of losses to date. Futures indicate a positive start to trading for the German leading index Dax and Wall Street.
This is probably also due to vague indications about interest rates from the US Federal Reserve (Fed). The world has recently “developed essentially as expected”: With this statement, Warsh supports the impression of observers that the Fed is inclined to raise interest rates further, but will probably not do so until December at the earliest. The next opportunity would be the week after next.
From the minutes of the most recent Fed meeting published on Wednesday, the experts at Deutsche Bank concluded: Apparently the Fed is “not in a hurry” to raise interest rates. In mid-September, it unanimously raised the key interest rate range to just under four percent.
The Fed chief, who has been in office for 148 days, is currently under pressure from two sides. US President Donald Trump is constantly demanding lower interest rates and colleagues and market participants demanding higher ones. Warsh can't possibly please everyone. Four weeks ago, like all Fed central bankers, he voted for the first interest rate increase in nine months.
In his push for a change of course by the Fed, Trump is primarily keeping an eye on the approaching midterm elections, while investors and central bankers are focusing on inflation. It has recently increased more than expected. According to official information, consumer prices were 3.7 percent higher in September than a year ago.
This means that inflation, driven by energy prices and huge investments in AI, is moving further away from the Fed's two percent target. The central bank has consistently missed it for more than five years. Interest rate increases appear to be necessary if the Fed does not want to lose control of inflation for the foreseeable future.
Warsh didn't say a word about it on Friday. In a conversation with IMF chief Kristalina Georgieva, he once again emphasized his new approach of revealing as little as possible about future interest rate policy. The Fed is committed to delivering price stability. The central bankers recently demonstrated this determination by “removing some of the monetary policy support”.
With this, Warsh repeated a common technical expression that suggests: The Fed does not yet see the key interest rate in the USA in a range that will slow down the economy as a whole. Investors therefore expect that the US Federal Reserve will raise the key interest rate two to three times by autumn next year.
For many Americans, however, the combination of high inflation and rising interest rates is a burden. Credit card and real estate bills are rising. In everyday life they can afford less and, according to surveys, are turning away from the ruling Republicans because Trump promised otherwise. Under the keyword “affordability”, interest rate developments are an important topic in the election campaign.
“The psychologically highly charged threshold of 7.5 percent for average 30-year mortgage interest rates will further exacerbate the rampant affordability crisis in the USA,” says NordLB analyst Constantin Lüer. “On the other hand, the situation surrounding the refinancing of the US national budget is becoming increasingly urgent.”
US Treasury bond yields have risen sharply in recent months. This increases interest costs for the government. Experts fear that the debt crisis will worsen. Warsh did not address this in Bangkok, nor did he address fears that the high investments in the construction of data centers for AI could turn out to be a bubble and, in the worst case, endanger financial stability.
His principled refusal to provide markets with guidance on interest rate policy and the Fed's intentions is a departure from usual practice. Investors are finding the change difficult. According to some experts, Warsh didn't always cut a happy figure at first.
Warsh breaks with a formative insight for which the US economist Michael Woodford received the Nobel Prize in Economics a few days ago: communication about interest rate policy, according to Woodford, is of similar importance to the economy as the level of key interest rates. Warsh emphasized in Bangkok that he has broken with this maxim because he considers it a relic from times of crisis: “It is a new chapter at the Fed and there is no more room for it.”
