Federal Reserve Chair Kevin Warsh testified before the Senate Banking Committee on the second day of his semiannual monetary policy hearings, offering a nuanced view on artificial intelligence, inflation, and the labor market. Warsh stated that recent inflation data is an imperfect gauge of underlying price pressures and that he is not satisfied with any current measure of inflation. He emphasized that the Fed will use both its balance sheet and interest rate tools to address inflation, which he believes will not be permanent.
AI and the Economy
Warsh described the surge in AI investment and company valuations as notable, but said that in the near term, AI investment is quite good for jobs. He does not view a one-time price change from AI as necessarily inflationary, though whether AI becomes inflationary depends on the Fed's response. Warsh believes AI will be a job creator overall, but acknowledged it will be disruptive, causing some job losses. He noted that if AI disappoints, much of the related capital investment still has alternative uses.
Labor Market and Monetary Policy
The Fed chair described the labor market as in good shape, with wages moving up at a reasonable pace, though the timing of further wage increases from productivity gains remains a puzzle. He sees significant structural change in the labor market. On monetary policy, Warsh stated that monetary policy has caused inflation and that he would consider both the Fed's dual mandates when implementing task force recommendations. He expressed openness to using monetary aggregates as a cross-check, noting that if they had been used in 2021, inflation might have been spotted sooner.
Balance Sheet and Independence
Warsh said the Fed's balance sheet should be as small as possible to allow for expansion in a crisis. He declined to share discussions with President Trump but stated that if the president tries to influence monetary policy, he would keep his head down and do his job. Task forces will have six months to report, with briefings starting as early as September. Warsh also highlighted that corporate earnings appear to be broadening out and that business capital investment is contributing massively to GDP, with the trend likely to continue.