Fed Chair Kevin Warsh Says US Economy Is Strong as Fed Holds Rates Steady

Fed Chair Kevin Warsh Says US Economy Is Strong as Fed Holds Rates Steady

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The U.S. economy’s third-quarter GDP is likely running above 3% growth, according to Federal Reserve Chairman Kevin Warsh, who stated Wednesday that economic growth has strengthened. This follows a revision of GDP growth for the first half of the year, which rose from an earlier estimate of 1.8% to 2.4%.

Speaking after a two-day meeting of the Federal Open Market Committee (FOMC), Warsh said the economy is “pointing in the right direction” and is “strong.” He attributed the recent rapid advance to healthy consumer spending and noted that productivity has been moving higher, though he admitted it cannot be measured precisely. Warsh added that “real activity is clearly pointing in the right direction” and described employment conditions as “quite positive.”

Warsh Says AI Investment Does Not Overheat Economy

Warsh addressed the impact of the boom in AI investment, noting that while it has created some demand pressures, the economy is not running too hot. He emphasized that the Federal Reserve’s objective “isn’t to throw sand in the gears” of the economy not running too hot. He noted that most of his colleagues do not judge the economy to be running too strong, though potential growth remains hard to determine. Regarding productivity, Warsh suggested that most of the improvements preceded discussions of “superintelligence.”

Fed Holds Interest Rates as Inflation Stays High

The Federal Reserve decided to hold its benchmark interest rate steady at 3.75%-4%, despite two officials dissenting in favor of a hike. Warsh stated that he does not believe growth itself is causing inflation or complicating the Fed’s mission. However, he acknowledged that inflation has remained above the committee’s objective for nearly six years and must come down. Warsh stated, “It’s our responsibility to get inflation down.”

Warsh highlighted that energy and related prices have increased in recent weeks. He stated it is the Fed’s responsibility to ensure price changes in specific sectors do not broaden across the wider economy. When questioned, Warsh declined to commit to a rate increase in December, stating that upcoming information will help the bank determine its policy.

Fed Chair Kevin Warsh Says US Economy Is Strong as Fed Holds Rates Steady
Photo: WGME

Market Outlook

While the Fed holds rates, prediction markets on Polymarket estimate only a 7% chance of a recession this year, a significant drop from a 37% high in March. In contrast, the odds of a recession in 2027 are currently 35%. Warsh also observed that financial markets have experienced shifting correlations and bouts of volatility.

According to the CME FedWatch tool, market participants are pricing in a 78% probability that rates will be hiked to a range of 4.00%-4.25%.

The advance GDP estimate for the third quarter is scheduled to be published this Friday.

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