Warsh says AI price gains may not fuel inflation as Fed holds at 3.75%

Federal Reserve Chair Kevin Warsh told the Senate Banking Committee on Wednesday that price increases tied to artificial-intelligence investment may not fuel sustained inflation, as supply-side responses could offset the demand shock — a nuanced departure from his hawkish congressional testimony a day earlier.

"I don't think a one-time price change necessarily pushes up inflation, because the supply side responds," Warsh said in response to questions about the inflationary impact of the AI buildout. "That's different from an external conflict, which tends to reduce the supply side of the economy."

The Fed chair acknowledged that AI-related investment has pushed up prices for computer chips and data-center equipment — high-tech capital spending rose nearly 25% on a four-quarter basis through the first quarter, he said. But he argued that unlike geopolitical shocks that shrink supply, AI infrastructure investment expands productive capacity over time, potentially damping rather than amplifying price pressures. The remarks came as June consumer price data showed annual inflation easing to 3.5% from 4.2% in May, though Warsh cautioned against reading too much into a single month's data.

Warsh's dovish framing of AI's price effects introduces uncertainty into the rate path just as the Fed's June Summary of Economic Projections showed nine of 18 policymakers saw the case for at least one rate hike before year-end. The central bank has held the federal funds rate at 3.50%-3.75% since July 2025, when it delivered the last of its 25-basis-point cuts in the previous easing cycle. OIS markets will now reassess whether Warsh's supply-side argument reduces the probability of a 2026 tightening.

Warsh's testimony before the Senate Banking Committee marked his second day on Capitol Hill this week. He reiterated his view that current inflation measures are "imperfect" and that the Fed's focus under his leadership will be on the real economy rather than Wall Street expectations.

"There are plenty of people on Wall Street who are upset with me already," Warsh told lawmakers. "My message to them is: play the ball, don't play the Fed."

The Fed chair also defended his decision to not submit a rate forecast in the central bank's June Summary of Economic Projections, saying the central bank's job is to respond to data rather than guide market expectations. He has established five internal task forces to review how the Fed communicates, manages its balance sheet, uses economic data, approaches productivity and employment, and frames its inflation goals.

The AI investment wave has been a central topic in Warsh's congressional appearances. Business equipment investment rose about 8% for the year ending in the first quarter, driven largely by data-center construction and AI-related infrastructure. The question of whether that spending is inflationary or disinflationary will be "up to the Federal Reserve, and we're going to have something to say about that," Warsh said.

The last time a Fed chair signaled a nuanced view on supply-driven price pressures was in 2023, when Jerome Powell distinguished between goods inflation driven by supply-chain disruptions and services inflation driven by labor costs — a distinction that preceded a prolonged hold cycle. Warsh's supply-side argument on AI could similarly extend the current pause, though the path depends on whether the AI buildout delivers the productivity gains he implied.

The Fed's next policy meeting is scheduled for September, with markets closely watching whether the recent moderation in headline inflation — driven largely by a more than 20% monthly slump in oil prices in June after the U.S.-Iran interim peace deal — persists. Brent crude has since rebounded nearly 9% this week amid renewed Middle East tensions, a reminder of the external supply shocks Warsh contrasted with AI investment.

This article is for informational purposes only and does not constitute investment advice.