Despite surging inflation, Federal Reserve Chair Kevin Warsh offered no hint of another interest-rate hike at an IMF event Friday, sending October hike odds tumbling as he talked up artificial intelligence’s potential to transform the economy.
Wednesday’s hot inflation report had sent CME FedWatch’s October hike odds soaring from 21% to 54%, making another increase more likely than not.
But those expectations quickly faded. San Francisco Fed President Mary Daly said Wednesday that further hikes were likely, but there was no urgency to act in October.
By the time Warsh spoke Friday, the odds had already retreated to around 28%. His refusal to signal another increase helped push them down to approximately 15%.
On Polymarket, traders now give an October quarter-point hike just 14% odds, compared with 87% for no change. The market has attracted $43.5 million in trading volume.
But traders aren’t ruling out another hike altogether. Polymarket’s December market puts the probability of a quarter-point increase at 79%, suggesting investors expect the Fed to delay its next move rather than abandon it.
The Fed’s Inflation Dilemma
“I don’t prejudge meetings,” Warsh said Friday during a discussion with International Monetary Fund Managing Director Kristalina Georgieva in Bangkok.
He refused to preview the Fed’s remaining decisions this year, saying economic developments had broadly matched policymakers’ expectations since September’s rate increase.
Consumer prices rose 3.7% annually in September, while producer prices jumped 1.3% during the month, the largest increase since March 2022.
The Fed raised its benchmark rate to 3.75%–4.00% last month, but September’s weak jobs report, showing just 29,000 positions added, complicates the case for another immediate increase.
S&P 500 futures rose around 0.2% following Warsh’s remarks, pointing to a firmer open for the SPDR S&P 500 ETF Trust (NYSE:SPY).
Chang Wei Liang, a macro strategist at DBS Bank, said Warsh’s optimism about AI-driven productivity could help ease inflation expectations and “temper fears of back-to-back Fed rate hikes.”
AI Boom Pushes Up Tech Prices
Warsh described AI as “probably the most consequential change” to the US and global economies in his lifetime.
He expects the technology to deliver substantial productivity gains and create wealth, but acknowledged that spending is boosting economic demand before those benefits materialize.
He warned the transition could be “very bumpy,” with employment effects over the next 12 to 18 months uncertain.
A San Francisco Fed report published Thursday found annual inflation in information-processing equipment reached 13% in August, its highest reading since records began in the 1960s.
Researchers linked the increase to AI-driven demand for chips, pushing up computer and smartphone prices, although they found little evidence of inflation spilling into other sectors.
Apple Inc. (NASDAQ:AAPL) raised MacBook prices by as much as $300 in June and increased iPad prices amid AI-driven memory shortages.
Image: Shutterstock
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