Fed Chair Warns AI Spending Could Trigger Economic Shock

Federal Reserve Chair Kevin Warsh cautioned that a surge in artificial intelligence spending could act as a "shock" to the U.S. economy, emphasizing the need to contain inflation. Speaking at an International Monetary Fund conference in Bangkok, Warsh said central bankers must recognize the development as a potential price-raising force.

"If you’re a central banker, you’re in the business of trying to ensure stable prices and full employment, you’ve got to recognize this as a shock," he said.

Warsh noted that AI-related investment is currently boosting demand faster than supply, which could push consumer prices higher unless offset by new output in areas such as chip manufacturing and data-center construction. He added that the path to the technology’s promised productivity gains is likely to be "very bumpy" and that the market structure for AI profits remains uncertain.

The chair also referenced other external pressures, including the recent Iran conflict that has driven up oil prices and contributed to a 3.7% rise in September inflation, according to the U.S. Bureau of Labor Statistics. Inflation remains above the Fed’s 2% target.

"It’s hard to be in a discussion with central bankers and not compare notes and hear the same thing about the surge in prices," Warsh said, noting that colleagues worldwide share a resolve to maintain price stability.

The Fed raised its benchmark interest rate by a quarter-point in September, its first increase since 2023, aiming to curb demand and lower inflation. The next policy meeting is scheduled for Oct. 28, ahead of the midterm elections. Warsh declined to forecast the outcome, stating he does not pre-judge meetings.

Investors have taken his stance as an indication that the Fed may keep rates steady at the upcoming meeting.