Fed Chairman Warsh on the Global Economy, AI (Full Interview From IMF)

[00:00:00] Speaker 1: Chairman Kevin Walsh. For those of you who may not be fully familiar with his incredible professional career, let me say a couple of words. Chairman Walsh was a keen scholar of policymaking throughout his entire life. He spent his career at this intersection of monetary policy, finance, and economic policymaking. And he has been able to look at issues that concern not only the financial system but the lives of people from multiple perspectives. He was an academic in the financial markets and in the public sector. So where did he come from? Just before he took over the chairmanship of the Federal Reserve, he was a Shepard family distinguished visiting fellow in economics at the Hoover Institute, a lecturer at the Stanford Graduate School of Business, and partner in the Dukes family office. He came to those from working at Morgan Stanley. He advised President George W. Bush on capital markets and banking issues. But my favorite part of Kevin's career is when he first was at the Federal Reserve at the Federal Reserve. At what time? In the most challenging and taxing time. He was there during the global financial crisis and he was there as the youngest ever governor at the age of 35. And he now, he's now 36. He has very deep, impressively deep understanding of financial markets, instrumental in navigating one of the most complicated periods in recent history. And set at the table with those who have made at that time critical decisions, the most consequential decisions for many in their lifetimes. So he saw crisis from the inside. I do not wish you ever to repeat this experience. And as we all know, in May this year he became a chairman of the Federal Reserve, great choice. I can say with admiration that you bring, of course, a lot of experience, but one quality that you bring that I rarely see is you have profoundly thoughtful response to questions and you never shy away of listening to opinions that may be different from yours. Now, I can say when Kevin agreed to be here, I thought, okay, so let me see how we can get the conversation. And that is, it is about the broad transformational trends. And dig deep into your thinking. I want to start from where the world is today. We are here at the annual meetings. We talk about a resilient world economy, but also about the fragility of this resilience, the divergence across countries. We discuss what are the sources of resilience, could they continue, would they last, what it would take for them to last. And I thought that it would be a great start for today to hear from you. How do you see the world economy? How do you see that resilience on which we have been relying, would it last? What is your advice to policymakers, how they orient themselves in a time of higher uncertainty? [00:04:38] Speaker 2: So, first of all, thank you very much, Kristalina. Full disclosure, Kristalina and I are old friends. So, those questions sounded harder, but there's some softballs coming, I presume. So, the only part of that biography that Kristalina read that I will differ with is, she said, the favorite, her favorite part of my resume is the global financial crisis. That is not my favorite part. And when I come back to meetings of the IMF, come back to meetings of the G20, I'm obviously incredibly honored to be in this post. This is a hugely consequential time, but when I walk into the IMF, when I come to these meetings, I will say I have still a little bit of scar tissue from the deepest, darkest days of the global financial crisis. I might be over-scarred from that period, but better over-scarred than under-scarred, I presume. So, we can go in any direction you want. I think you were asking about the state of the global economy. So, what I've tried to do, which might be a little bit of a change for policymakers, is what I try to do is look outside the window. In our business and economics and policy-making circles, we can focus on the past, on the history, and look at data, which we think of sometimes as contemporaneous data, but it's really lag data. It's about what happened. We can also focus a lot of our time and attention on the future. We certainly want to know what 2027 and 2028 are about, but none of us are perfect forecasters. So, what I try to do in thinking about what's going on is I try to look out that window as clearly as I can. At the Federal Reserve, we do that about eight times a year when we sit down for these FOMC meetings. We did that, I don't know, a month or so ago at the September meeting, and we came to a judgment. What are we seeing in the global economy as it affects the U.S.? I'm going to say broadly over the month or so that's transpired since then, the world has broadly conformed to our expectations. We'll be meeting a couple more times this year, and that will be the crystallizing moment at which we're going to look out the window. What do we see? What's happening to output? What's happening to employment? What's happening to inflation? And in those inter-meeting periods, especially occasions like this, when Kristalina and I get to sit down without the cameras and the microphones, and I get to sit down with my G20 colleagues, I'm doing at least as much listening as I am talking. Obviously, the Federal Reserve and our policies spill over to the rest of the world, but their policies spill back to us too. So I had made judgments about a month ago. I'll make some judgments at the October meeting and the December meeting. But broadly, let me just step back and give you now slightly dated views, which probably still hold. One is, 20 years ago at meetings like this, we talked about secular stagnation. Boy, that seems, I don't know if it was as inaccurate then as it seems now, but right now we have structural growth. We have an investment surge. It's not hitting every country at the same element, but in the United States we're having a massive investment surge. And it makes me think, Kristalina, the idea of secular stagnation suggested that that was somehow inevitable. There was nothing policymakers like you and me could do about it. If we learned anything since my last time sitting in a post like this and now, there's a lot we can do about it. Policy matters. The investment surge isn't by accident. It's because of the consequence of good policy, both macroeconomic policy, but also, as you've heard about in the last week or two from new Nobel Prize winners, the micro-foundations. And decent macro policy and strong micro-foundations can lead to an investment surge. It's probably the most important thing that's happening in the global economy on the upside. But to be balanced, as we central bankers have to be, you know, I came out of meetings here yesterday and today, and it's hard to be in a discussion with central bankers and not compare notes and hear the same thing about the surge in prices. It obviously affects each of us differently. At the Federal Reserve, we made very clear that we would deliver price stability, and we removed a dose of accommodation about a month ago. I don't prejudge meetings. I don't believe in saying now what I might do at the meetings that we have in the balance of this year. But that was the situation. You just disappointed half of the audience or more. I know. They can all turn it off. It's a new chapter at the Fed, and we're not in that business anymore. But we can go in any direction you'd like. [00:09:26] Speaker 1: Well, this is a very good direction. So we talk about the -- you rightly say, you look out of the window. What we see is an economy that in some places is booming. It is being dragged upward, mostly by enthusiasm about AI. But then you go into other places and other factors, especially the impact of war. It's dragging economies down. One thing that is happening everywhere, whether your economy is going up or it's going down, is the stubborn inflation, price pressures that are coming from everywhere. And one of the sources, of course, is the energy shock in the Middle East and the energy shock from war. But one of the sources is this investment enthusiasm about AI. So my question is, from a monetary policy perspective, how should we think about the impact of AI in the short term, in the long term? Is there anything that we are paying too little attention and should be paying more attention today? [00:10:51] Speaker 2: Yeah. So it's a great question. A couple of things. First, Crystalia, you pronounce it AI. In the U.S. we now pronounce it SI, just so you know. So it's probably -- Can I say potato, potato? Yes. That's right. It was just -- I don't know how that's going to translate for the countries around the world with teams of folks. I'd say the advent of this new technology is probably the most consequential change to the U.S. and the global economy in my lifetime at this point. Yep. So I take it seriously, but as a central banker also soberly, responsibly, I'd say it's going to do several things. First, it's obviously hitting the demand side of the economy before it's going to hit the supply side of the economy. So if you're a central banker and you're in the business of trying to ensure stable prices and full employment, you've got to recognize this as a shock. But it's a positive supply shock in the medium term. I do fundamentally believe that. But on the path to that positive supply shock, we're seeing increases in aggregate demand. It just is what it is. But I think of this shock differently than those other shocks you talked about, shocks of war and military conflict and the rest. This one, there really is, I think, a huge benefit to the global economy, to the U.S. economy over the horizon. So that's one comment. Second, it's a big deal for central banks because we're in the business of trying to, in some ways, distill noisy data all over the world. We get some of that from official statistics in the U.S., from the Bureau of Labor Statistics, the Bureau of Economic Affairs. We torture data with old-fashioned models to try to find out what's underlying inflation trends. Not so long from now, it won't be torture. We will have access at the fingertips of central banks to all the information in the world. And we'll be able to use new analytical tools to distill that data. So when we get new information, we're going to have a lot more confidence in what it tells us as we're looking outside the window and saying, is that real or is that lagged and noisy data subject to mismeasurement? So I think it's going to fundamentally change the conduct of monetary policy as a second point. Third, it's going to change the real economy. We don't know in the next 12 or 18 months its effect on employment. But if you believe like I believe, which is it will make economies and countries that put it to good use more productive, that it's going to make it so that we will have more wealth, then that has to be a very good thing. But the path from where we are to there is likely to be a very bumpy one. Bumpy in our understanding of the technology, bumpy because we really don't know what the market structure is going to be of these new technologies. Who's going to get to make the money? What are the consequences for those that bet that they were going to make money but the market structure doesn't allow it? So I want you to hear from me optimism, but optimism leavened by the seriousness of purpose to the day jobs that you and I have. And I think it's an exciting development and it's an innovation that I think a decade from now they'll look back on and they'll say this was hugely consequential. So our job as policymakers to take it with that same kind of focus. I'll just say one more thing. On big hard questions that don't matter much to the current policy conjuncture, my view is we at the central bank need to invest in the next policy conjuncture. Yep. So among the external task forces that I initiated about four or five months ago is one on productivity and jobs. We're going to have our first field hearing of a task force on November 16th in the Bay Area where we're going to wrestle with these issues. I'm pretty sure I've got the right questions, not sure I have the right answers. And so we've got a group of outside experts both on the task force and people in the broader community to help us engage on that. And hopefully they'll be fruits of that, not just for us in the U.S., but these efforts that we're doing and investigating at the Fed, these are global public goods. And might the IMF, might other G20 central banks learn, decide to adopt some of these things on their own? That's the hope and expectation. The better they do, the better we do. [00:15:29] Speaker 1: Very much look forward to that. So to avoid linguistic controversy, let's call it the NHI, the non-human intellect. So if we look at that development that is incredibly rapid, we do have to think about the impact on inflation, short and long term. We do have to think about impact on financial stability. And as you said, there is the excitement of what it may mean for productivity. On this triangle of inflation, possibly disinflation in the future, the impact on financial stability risk and the upside on productivity, which one you get your task forces to concentrate most on? What is, in your view, the one issue that dominates monetary policy makers? [00:16:39] Speaker 2: Yeah. So first, here's my working proposition about task forces. Because I've been on task forces like you have before we were in these jobs. You want to ask them the questions. Mm-hmm. And to be full disclosure, I check in with each of my five task forces periodically. Mm-hmm. But you also want to let them be themselves. The idea of the task force on productivity and jobs, on data collection, on inflation, is to let them produce new intellectual capital. And to drop that on the Federal Open Market Committee. To share their views with the broader audience and see whether that catalyzes new thinking. Otherwise, you and I and our peers in central banking, we could just push the same ideas around. Mm-hmm. The idea is to really let them do it. Right. There are tail risks associated with all shocks. I'm not going to bite off one tail and say it's all to the good. Yeah. What I'd say is the U.S. is investing through the private sector capital in a range of new technologies, in a range of new companies, with bets on different parts of the market structure. In my business, we don't have to figure out who's right or wrong. That's what financial markets are for doing. But we do want to step back and ask ourselves the question, if various scenarios were to happen, what are the implications for our remit? Our remit, as you know, we talk about as stable prices and full employment. But inching into that, again, with the history of my visits to the IMF 20 years ago, we also want to think about financial stability risks. Yep. And the way I think about it might be a little bit different. Mm-hmm. I don't think the central bank or the international policymaking set that we should be in the business of stopping variance away from modal outcome. What we ought to want to ask ourselves, though, are there negative tail-side risks that we can do something about? And we have to be pretty humble about that question. I've given the task force every ability to sort of ask themselves, what are the upsides, what are the downsides, and what are the implications for us? The same way I'm not going to prejudge FOMC meetings, I'm going to try not to prejudge where they come up. The task forces. [00:19:04] Speaker 1: Yes. Very good. Anyway, Kevin says we both have been on task forces. He was leading one that resulted in the Queen of England reporting the results to the parliament. So it's a very special chairmanship you offer. Now, I counted, Kevin, today is your 148th day on the job. And actually, there is a little risk in my calculation because it depends whether you calculate in Washington or here in Bangkok. But we are about there. So what is that you have reached a conclusion now that you didn't have on the first day? How do you see moving into the job further? [00:19:59] Speaker 2: Yeah, so it's a fair question. I'm probably not best at introspection, so full disclosure on that. I'll begin by saying I'm sure glad I was there before. If I hadn't been at the Federal Reserve for five and a half years, especially during a period of some consequence, I think I'd probably be a bit more hesitant to introduce new ideas, to practice new ideas inside the Federal Reserve of 23,000 people, to sort of probe the question of, can we create a new chapter at the Federal Reserve? I'm not making the best of the Fed's traditions, but recognizing this is a brand new world. So first, I would say five and a half years of time served, I think has served me well. You know, it's said that sometimes someone that, when they join an organization, they want to bring the fresh perspectives of an outsider. I will balance that by saying you also have to have some of the knowledge of an insider. I'm trying to think of myself as being on the edge of the inside. So what are my lessons from 148 days? First, there's an incredible depth of talent at the Federal Reserve. I must say, a little piece of me worried, I've been gone for 15 years. I wonder whether all the talent might have left at some point in those 15 years. There's an amazing amount of talent that's still there. And the lucky thing for me is, when I was young, they were young too. And they're incredibly dedicated to the mission we have. They're as proud as I am to say, I work at the Federal Reserve. And so part of all these jobs is getting policy right. But one key way to get policy right is to make sure the culture is right. And if I go deep in the organization, I see brilliant people practicing new ideas, challenging each other. Maybe for people that are on the outside of the Fed, it sounds all like we're all reading from the same script. But just beneath the surface, there's something really, really impressive. And so that's a takeaway. I would say I'm surprised the upside, how much talent is there. Now, our job in running these organizations is how do we tap into that? How do we get the benefit of what they know, but rethink, reorganize? How to bring that to bear? So that's one. Two, I'd say, where I would say I failed in my first 148 days is mostly because of all of you and the people that are on the end of this camera, they're all focused on monetary policy. Well, 75% of the people at the Federal Reserve, they don't work directly on monetary policy. We're in a lot of businesses. Businesses given to us by Congress, supervision and regulation, payment systems, consumer and community affairs. I could go on and on. I haven't been as good as I need to be to make sure they know I care about their issues as much as I care about the conduct of monetary policy. So I've probably been drawn a little bit, maybe because of this moment, but the head of the Fed needs to be the head of all parts of the Fed. And I say that not without enthusiasm, I say it because ultimately what matters to the central bank, what's most important about what we do, it's not the printing press. It's a powerful tool. It's neat. If you guys had one, you'd love it. But the power really comes from our institutional credibility. And that was bestowed on me by the great chairman that came before me. Yep. And the only way that we're successful in getting policy right is if we burnish that institutional credibility. And so whatever any part of the Federal Reserve does, if they slip up, if they stumble on supervision or on payments, that reflects on our institutional credibility. So my next 100 days, I'm going to try to give equal focus those other parts of the business because they matter too. And, you know, when you take over a position like this, you need to lead all of it. And you need to love the institution enough across everything they do to go back and ask first principles. Instead of, well, we do it this way because that's how we've always done it. That's not good enough. [00:24:14] Speaker 1: Not good enough indeed in a rapidly changing world. So you mentioned that there were the leaders before you. You're the 17th chairman of the Federal Reserve. When you look back, what is it that mostly inspired you of the leadership of the past? I don't know whether you have gotten that far to think of what you want to leave behind. But what do you think the 17th chairman of the Federal Reserve may be remembered for? [00:24:47] Speaker 2: Boy, it's been 130 days. I'm not in the legacy business. I'm in the business trying to get policy right. So that may be what you're remembered for, Kevin. I mean, I don't think I took over at the easiest moment. I think I took over at a time that's a time of consequence. So I must say I don't think about it like that, but I'll say a word about my predecessors. I'm lucky enough to have known or worked with my five immediate predecessors. That's very impressive. I remember when I was summoned as a young nominee to be a governor at the Fed. One of the ranking members of the Senate Banking Committee looked at me, thought I looked a little young, I suspect, for the job. And he wasn't so sure that I was right. And he sent me to a meeting with Paul Volcker. And, you know, I was 35 at the time. I remember going in there, still a big strapping guy. I called him Mr. Chairman. If it were these days, I would have brought one of these cell phones and done a selfie. I probably brought an autograph book showing that I was still a child. But I learned from each of them. I would say if I think back of the Volcker era, the Greenspan era, the Bernanke era, they met the moment of their times. They were each confronted with challenges that their predecessors weren't confronted with. And they managed to take a great institution and match the moment. I hope I'm not brought to those sorts of challenges. I hope the next three years and eight months or so is just nothing but benign. But they were there. We will all pray for that, Kevin. But they did that. And I would say those three, they loved the institution enough to be unafraid to challenge it. To change it. To think about a new chapter. That isn't somehow bad to think about reforms. They made reforms that were necessary to conquer that moment. And I would say this about each of them. They were all three very different people. But what they found in the institution was an enormous amount of talent, which is what I found. But they found themselves in a policy conjuncture that was in no textbook. And they figured out how to do it. That doesn't mean that any of them had perfect records. I don't think any of them would say that. But they figured out how to make policy about as good as they could. And that's an incredible, incredible legacy. So I've learned from them. But the idea that the new, the 17th chairman of the Federal Reserve is going to act like the 13th, 14th, or 15th, there's no status quo ante to return to. The world, in my view, is changing faster than at any point in my adult life. Yes, agreed. And so we need to be on the front of our shoes, on the front of our feet, to ask ourselves, what's this mean for us? And so I can be inspired by them. I can be proud that they left the institution with more institutional credibility, which makes our job easier. But beyond that, I'm not spending a lot of time looking back. I'm spending a lot of time looking out the window and saying what's really going on. You know, you mentioned a speech I gave a little while ago in Jackson Hole. One of the themes of that is our first job is to interrogate reality, what's really happening. I think it's Orwell who said the hardest thing to know is what's right in front of you. At least for me, it's hard to know exactly what's going on out there. That's why coming to meetings like this to hear other people's perspectives, see what's happening in their economy, it sure matters. And I plan on doing more of it. [00:28:38] Speaker 1: What is it that these meetings so far impressed you the most? What is the one thing that you are learning here that you would take back to your colleagues? [00:28:50] Speaker 2: So I'll take a few things back. I would say we have a lot of common challenges. Listen, I feel in the United States that the real economy, because of a resiliency that you mentioned, but because of a surge of investment, which isn't just AI, that surge of investment is broadening. That means we've got plenty of tailwinds that are giving some strength and durability to this economy. That sort of momentum is certainly not found everywhere in the world. Yes. Yep. But what is striking to me are two things. Almost everywhere in the global economy is showing resilience that I'm not sure I would have predicted five or six months ago. Given what's happening in geopolitics and hotspots around the world, if you had made me sort of give some IMF forecast of what's going on, I'm not sure I would have found that so many members of the G20 were hanging in there whose economies were doing well. I might have said about the United States. I don't think I would have said that about so many. The other thing which is a commonality, is a common challenge, is I mentioned at the outset, is inflation is not unique to the United States. So we're looking at it together. Each of us obviously make the choices that we feel we have to make given our own domestic remit from our own Congress, from parliaments around the world. But there are spillovers and spillbacks. And I heard, I would say, resolve from my colleagues around the world to deliver price stability. I've certainly delivered that resolve. Yes. We have different tools, different sequences. But I would say if I look back over the last few months, while we each did the right thing by our own judgment, by our own remit, it was a synchronous tightening in monetary policy in most places around the world. And that means there's no free riders. We're seeing common things and we're taking action. And I view that as a positive development. I very much agree. [00:30:56] Speaker 1: I think that the common vision around making sure that price stability is set and it gives that confidence to businesses and households, that is so important for growth to continue. And yes, I agree that is one of the big messages from this meeting. We are running out of time. Is there anything you want to tell these people that I didn't have the wisdom to ask you? [00:31:26] Speaker 2: So, Kristalina did a wonderful job. I might invite you to my next press conference. These questions somehow are a little bit more cordial than some of the things I get. I'll just say this. I'll leave with a final comment, which is anyone that's at the Federal Reserve, particularly anyone that feels fortunate to sit in my chair, I feel an incredible amount of gratefulness. I feel as though the world is moving faster than ever changes to how we think about what happens to our economy is subject to differences now that might have been hard to believe five or ten years ago. But I'm grateful. I'm grateful for my colleagues at the Federal Reserve. I'm grateful for the staff. And I'm also grateful for the remarkable openness to new ideas. I have felt it in my private meetings with you. I've felt it from my G20 colleagues. Our objective is to get policy right. Our objective is to think anew about questions. And the thing that we don't hear and we don't want to hear is, well, this is how we've always done it. Or this is what the model says. Or the model says this will happen after that. I prefer frameworks to going to mean regressing models. And I think with your help, Kristalina, with the help of our incredibly strong colleagues around the world, we're going to get through a time of huge consequence. And I believe, optimistically, you might think naively, at least in the U.S., we're going to come out of this stronger, with a more durable economy, more capable of leading the world on economic growth so it's not zero sum. And hopefully we're going to come up with some new ideas that other countries, with their own decision making, will say those work for us, too. So thank you. [00:33:21] Speaker 1: Ladies and gentlemen, Chairman Kerry Walsh, the defender of high stability. Thank you.