US Fed chief surprised by world economy’s ‘resilience’

Resilience means the global economy has continued to withstand major pressure without collapsing into a severe downturn. Warsh was surprised that activity remained relatively strong despite inflation, energy shocks, higher interest rates, and financial stress from rising bond yields. This matters because such shocks can weaken spending, investment, employment, and growth.

At the IMF-World Bank meetings, Warsh said almost everywhere in the global economy was showing resilience. He also said the world had broadly followed the Federal Reserve’s expectations since its September meeting. Central banks were tightening policy, yet economies continued to absorb the effects.

This does not mean the outlook is risk-free. Inflation remains a problem, especially in the United States, and the path ahead for AI investment is uncertain. Warsh’s point was that economies have so far handled powerful shocks better than he expected, although future growth may still face a bumpy road.

The global economy faced several shocks at once. World oil and gas prices skyrocketed after the war involving Iran, while retaliatory action plunged the Middle East into crisis. Those higher energy costs added to inflation. At the same time, AI investment increased demand, creating another source of price pressure.

Central banks responded by raising interest rates. Most rich economies tightened policy, including the European Central Bank, as they tried to bring inflation back toward target. Higher rates made borrowing more expensive, while rich countries also dealt with spiking bond yields. These forces could have caused a much sharper slowdown.

Instead, Warsh said economies showed unexpected resilience. Many advanced economies had already returned post-pandemic inflation to target, although the United States had not met its 2% goal for more than five years. The economy therefore absorbed multiple shocks, but inflation and uncertainty still shape the outlook.

The Fed’s stated long-term inflation target is 2%. The article says inflation has remained above that target for more than five years, meaning the United States has experienced a persistent shortfall in price stability. However, it does not give the latest inflation rate, so the exact gap in percentage points cannot be measured from the information provided.

For example, if inflation were 3%, the gap would be one percentage point. If it were 4%, the gap would be two percentage points. Those examples explain the calculation, but they are not figures reported in the article. The important fact is the duration: the target has been missed for over five years.

That long period puts pressure on Fed Chair Kevin Warsh to restore price stability. The Fed raised rates in September for the first time in three years. Markets expected it to hold in October before a possible 25-basis-point increase in December.

When central banks raise interest rates, they try to reduce demand so prices rise more slowly. Borrowing becomes more expensive for households buying homes or using credit, and for businesses financing equipment, expansion, or new projects. Saving can become more attractive, so some spending is postponed. These effects help ease inflationary pressure.

For example, a company facing higher financing costs may delay a factory, hire fewer workers, or reduce investment. A household may postpone a home purchase or cut discretionary spending because loan payments are higher. Lower demand can eventually weaken price increases, but it can also reduce sales, employment, and economic growth.

The article describes this trade-off through the coordinated rate increases of rich economies. Central banks judged that fighting surging inflation required tighter policy. Warsh still said the global economy had shown resilience, but synchronized tightening leaves no economies as “free riders” and can make the growth outlook more difficult.

Higher oil and gas prices can raise inflation because energy is used throughout the economy. Transporting goods, heating buildings, generating power, and producing materials all require energy. When those costs rise, businesses face higher expenses. In general, many pass at least part of the increase to customers through higher prices.

For example, more expensive oil can raise shipping and delivery costs. A manufacturer may then pay more to move supplies and operate machinery, while retailers pay more to stock stores. Those added costs can lift prices beyond the energy sector itself. Households may also have less money for other purchases after paying more for fuel or heating.

The article says world energy prices skyrocketed after the conflict involving Iran, helping spur inflation in many economies, including the United States. That pressure encouraged central banks to raise interest rates. If energy costs remain high, inflation can stay difficult to control even when demand weakens.

Synchronous tightening means central banks in different countries raise interest rates at roughly the same time. They did so because many advanced economies faced the same broad problem: inflation was running too high. Each central bank acted according to its own judgment and legal remit, but their responses became coordinated in timing.

The article gives the European Central Bank as one example. Warsh said most rich nations had begun raising rates and described the recent period as synchronous tightening in monetary policy. The common mechanism is straightforward: higher rates restrain spending and borrowing, helping central banks bring inflation back toward target.

Warsh viewed the shared response positively because there were “no free riders.” Countries were not relying on others to control inflation while keeping their own policy loose. Still, simultaneous tightening can make financial conditions harder across many economies at once. The article says global economies remained resilient, but the policy effort was substantial.

AI investment can affect inflation in two opposite phases. In the short term, companies spend heavily on technology, equipment, energy, and workers. That surge in demand can strain available resources and push prices higher. Warsh said the AI investment boom would drive prices up in the near term.

Over time, AI could help businesses produce more with the same resources. It may improve efficiency, automate tasks, and support new products and services. In economic terms, that would be a positive supply-side shock: the economy could provide more output, which could reduce price pressure and raise productivity. The article describes this long-term benefit as potentially huge.

Warsh called AI the most consequential change to the global economy he had seen, but he expected a bumpy path. The technology and future market structure remain uncertain. He said he was taking its macroeconomic effects seriously as the Fed considers inflation and economic conditions.