Federal Reserve Chair Kevin Warsh reiterated an optimistic view that artificial intelligence will significantly boost economic productivity and generate new wealth. His remarks expressed confidence in AI's long-term growth effects at a time when global financial markets have swung sharply amid mounting attention to the heavy borrowing of AI companies and growing doubts about the profitability of their investments.
Speaking with IMF Managing Director Kristalina Georgieva at the annual meetings of the International Monetary Fund and the World Bank in Bangkok on the 16th, Warsh called AI "probably the most consequential change in the U.S. and global economy in my lifetime," according to Bloomberg and other outlets. "Ten years from now, people will look back on this period and say it was an enormously consequential change," he said, voicing expectations for AI's long-term economic impact.
He assessed that there will be a time lag between the demand and supply sides of the economic effects from expanded AI investment. "AI is affecting the demand side of the economy before it affects the supply side," Warsh said. The remark was read as meaning that while enormous sums are flowing into AI infrastructure such as data centers and semiconductors, economic results from productivity gains will take time.
"The path to getting to that point could be very rough," he said, while stressing that "countries that use AI effectively will see higher productivity and create more wealth."
He also expected the U.S. economy to benefit from expanded AI investment. Warsh said "a massive increase in investment" is taking place in the United States and that "investment is spreading to areas beyond AI." He added that concerns about secular stagnation are now a thing of the past.
AI will also fundamentally change how monetary policy is conducted, he said. The Fed is conducting research to examine AI's impact on monetary policy. Warsh said a task force studying productivity and employment plans to hold a listening session in the San Francisco Bay Area on Nov. 16. He avoided specific comment, however, on whether rates would be raised further — the question that had drawn the most market attention.
Financial markets read his comments that day as pointing to a rate hold in October. Investors focused on the fact that Warsh did not signal any particular urgency to tighten further, even as recent inflation data has come in higher than expected. "In the month or so since our last meeting, the global economy has broadly tracked our expectations," Warsh said. According to CME FedWatch, the probability of an October rate increase priced into rate futures markets fell from about 30% to the 10% range while the dialogue was under way.
Separately, the heads of Korea's and the United States' finance and monetary authorities gathered in one place for the first time on the sidelines of the IMF annual meetings. Deputy Prime Minister and Minister of Finance and Economy Lee Hyoung-il and Bank of Korea Governor Shin Hyun-song held four-way talks with Warsh and U.S. Deputy Treasury Secretary Frances Brooke. Erin Brown, U.S. Treasury under secretary for international affairs, also attended on the American side. It was the first time the top finance and monetary officials of the two countries have met in a "2+2" format. The meeting was said to have been arranged thanks to the close ties between Shin and Warsh. The two are known to be close enough to exchange mobile text messages regularly.
At the meeting, the economic and monetary chiefs of the two countries shared assessments of recent economic conditions and discussed ways to cooperate on economic and financial matters. "This is the first time the finance ministries and central banks of the two countries have come together in this form," Lee said. "These four-way talks are especially meaningful."
With U.S. interest rate policy directly affecting the value of the dollar, the won exchange rate and Korea's bond market, the meeting is expected to serve as an occasion to strengthen communication between the two countries' economic and financial authorities. Lee has been in Bangkok since the 14th of this month to attend meetings of Group of 20 and Group of Seven finance ministers and central bank governors as well as the IMF and World Bank annual meetings.