Fed’s Warsh surprised by world economy’s ‘resilience’

Federal Reserve Chair Kevin Warsh expressed surprise on Friday by the global economy's resilience in the face of strong economic shocks, as central banks grapple with surging inflation and rising bond yields in rich countries. Speaking at an IMF-World Bank Annual Meetings event in Bangkok, Warsh stated that he was not convinced he would have predicted the resilience five or six months ago.

The recent surge in world energy prices, driven by the US-led war on Iran, and the rise in AI investments have contributed to inflation in many economies, including the United States, putting pressure on central banks to increase interest rates. While some rich economies have managed to bring post-pandemic inflation back to their targets, the Fed has not met its long-term two-percent goal for over five years.

Warsh, who took over as Fed chair in May, has pledged to deliver on the central bank's price stability commitment. In September, the Fed raised rates for the first time in three years, with markets anticipating another 25-basis-point hike in December. Warsh vowed to minimize insights into Fed policy positions, avoiding speculation on the future of monetary policy at the upcoming October meeting.

The annual meetings brought together finance ministers, central bankers, and policymakers from around the world, with Warsh noting the "common challenges" faced by advanced economies. He reported hearing resolve from his colleagues to deliver price stability, emphasizing that most rich nations had begun to raise rates in response to inflation.

Warsh highlighted the synchronous tightening of monetary policy globally, viewing it as a positive development. Banque de France Governor Emmanuel Moulin suggested that rising bond yields in France were helping the ECB to tighten financial conditions, potentially providing the ECB with greater flexibility to control inflation. The discussions on Friday centered on artificial intelligence (AI), with Warsh declaring it the "most consequential change" in the global economy he had witnessed.

He predicted the technology would have positive effects but cautioned that the path forward would be bumpy due to uncertainties about market evolution and the structure of new technologies.