Warsh’s Fed, buoyed by AI optimism, launches this week as markets bet on rate hikes

The new Federal Reserve System (Fed) will officially launch this week after the U.S. Senate on the 13th local time approved the nomination of Kevin Warsh as the next Fed chair. But markets are paying more attention to the risk of a renewed inflation surge and soaring oil prices driven by the Iran war than to Warsh’s optimism that artificial intelligence (AI) will structurally lower prices. The nomination passed by a narrow 54-45 margin, a rare outcome in modern Fed history. Analysts say political tensions and internal conflict at the Fed could continue as future rate decisions are made.
Warsh’s monetary policy philosophy centers on optimism about AI. He sees AI as "the most productivity-enhancing wave of our lifetimes" and argues that, like the internet in the 1990s, it will create structural disinflationary pressure.
On Wall Street, however, some analysts say that view could instead lead to a prolonged high-rate environment. Their argument is that the AI investment boom may lift growth expectations and push up the neutral rate itself.
Big tech companies such as Microsoft, Amazon.com, Inc., and Meta Platforms have each announced plans this year to invest tens of billions of dollars in data centers, semiconductors, and power infrastructure. J.P. Morgan Asset Management said the upfront spending needed to develop AI is affecting the economy as a demand shock before productivity gains appear, adding that in the short term AI looks closer to an inflationary force than a disinflationary one.
In fact, the United States Consumer Price Index (CPI) rose 3.8% from a year earlier in April, beating expectations, while the Producer Price Index (PPI) increased 6.0% on an annual basis. According to the CME FedWatch Tool, which is often used to predict U.S. rates, the probability that rates will be held steady in June stands at 97% to 98%, while bets on a rate hike by year-end have climbed to more than one-third.
km@fnnews.com Kim Kyung-min Reporter