Federal Reserve Chairman Kevin Wersh said on Wednesday that inflation risks have eased recently, but the central bank still has more work to do to rein in rising prices.
“Inflation risks have diminished,” Warsh said. He said “energy prices have decreased significantly” since the United States and Iran signed a memorandum of understanding last month to end the ongoing war.
“They’re still a little bit above where they were before the conflict, but they’ve come down,” he said.
inflation is an Achilles’
According to opinion polls and consumer surveys, inflation is an Achilles’ heel for Americans, who are becoming more dissatisfied with the economy. In May, inflation, as measured by the consumer price index, rose to 4.2%, its highest level since 2023. The Fed’s preferred inflation gauge also showed that price increases were hot, driven by rising energy prices.
Warsh also noted the growing impact of artificial intelligence on the economy and inflation, expressing optimism about the technology’s long-term prospects.
“We are all facing a series of shocks in America,” Warsh said. “The AI shock is accelerating capital spending. We see it primarily in demand, but I believe we will also see it in supply at some point. So we’re spending most of our time monitoring those developments.”
Still, the central bank chief declined to give any indication about whether policymakers would raise interest rates: “I’m not going to give you any predictions as to what we’ll do.” Warsh has said he plans to break ties with recent Fed leaders to limit the amount of communication about the Fed’s future plans.
Asked whether the Fed would make this decision despite President Donald Trump’s wishes, Wersch said, “We have been an independent central bank for a very long time. We will be an independent central bank this time, and you won’t see any change in that.” Trump has repeatedly pressured the Fed to cut its key rate, often attacking Wersch’s predecessor, Jerome Powell, on the matter. (Powell, like Warsh, was appointed to the role by Trump.)
Warsh was in Sintra, Portugal, speaking alongside European Central Bank President Christine Lagarde, Bank of England Governor Andrew Bailey and Bank of Canada Governor Tiff Macklem at one of the highest-profile gatherings of central bankers each year.
Lagarde largely agreed with Wersch’s outlook on inflation, saying that the upside risks to inflation and downside risks to economic growth prospects are “probably more broadly balanced” now than they were a few weeks ago “as a result of what we’re seeing” with energy prices.
The European Central Bank is one of only two major central banks to raise rates since the start of the war with Iran, while the Federal Reserve kept rates unchanged at its most recent meetings as it looks at the spread of inflation from energy to other parts of the economy.
Warsh said there’s one key area the Fed is monitoring: the AI industry.
As major cloud computing companies like Microsoft, Meta, Alphabet and Amazon rush to build data centres around the world to power new AI models and systems, prices for computer equipment and memory in particular are skyrocketing.
As a result, consumer electronics companies like PlayStation and Xbox have raised prices. But the most notable price increase came on Thursday, when Apple raised the prices of iPads, Apple TV devices and HomePod speakers, as well as many of its laptop and desktop computers.
Apple did not raise the prices of the iPhone, Apple Watch and AirPods, but many analysts predict that these could be the next prices.
Asked about the AI boom and whether it could be inflationary in the long run, Warsh said it’s “one of the central questions we all have about our daily actions”.
But Warsh predicted that the United States “is likely to be a big winner in this over the medium term”.
He said, “When the Internet was born, who knew it would create 1.5 lakh jobs as Uber drivers?” We are in the first or second innings of this revolution.”
“This is a major paradigm shift for both our policy conduct and our economies,” Warsh added. “I think jobs will grow and prosperity will be strong.”
Many economists, corporate leaders and analysts have warned that AI could significantly reduce jobs. A study by financial operations firm Ramp found that companies that are spending more on AI are also growing their workforce.
Reiterating what the Fed said after its recent interest rate meeting, Wersh said labour markets are stable and the demand side of the economy is solid: “Again, this is before we see the fruits of AI.”
“But we’ve all looked around and we’ve seen that prices are too high, and I don’t think I’m alone at this stage in being committed to providing price stability,” Warsh said, referring to one of the central bank’s two legal mandates.
At Warsh’s first meeting as chairman last month, the Fed kept interest rates on hold even as other policymakers anticipated raising interest rates before the end of the year – with speculation that the chairman would tone it down in a press conference.
The Fed’s rate-setting committee is scheduled to meet on July 28 and 29.
