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The Federal Reserve faces a critical decision on interest rates
toggle caption Eric Lee/Getty Images North America
It's decision day at the Federal Reserve — and policymakers are weighing a critical decision: What to do about interest rates in the face of stubborn inflation.
Kevin Warsh, who took over as Fed chairman two months ago, has been careful not to tip his hand about where he thinks rates should go. But Warsh told lawmakers earlier this month he and the other members of the Fed's rate-setting committee are determined to bring prices under control.
"My colleagues and I recognize that high inflation has been an undue burden on American households and businesses," Warsh told the Senate Banking Committee at a hearing this month. "The members of our committee have no tolerance for persistently elevated inflation and we share a resolute commitment to restore price stability."
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At the last Fed meeting in June, committee members signaled their next move on interest rates would likely be up — not down. A wartime spike in gasoline prices pushed the annual inflation rate to 4.2% in May, its highest level in more than three years.
Inflation cooled somewhat last month, however, so Fed policymakers may feel like they have some breathing room to hold rates steady for now. But there's no guarantee. Investors see a possibility that the Fed raises rates on Wednesday in response to stubborn inflation.
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Higher interest rates tend to be a drag on the job market, while lower rates can boost hiring. Weakness in the job market prompted the Fed to cut interest rates three times last year. But this spring, the labor market appeared to rebound.
"America's labor force appears to be broadly stable," Warsh told lawmakers. "Job creation has kept pace with the workforce. The unemployment rate [is] quite low and has changed little, quite frankly, over the last year."
AI is also becoming a factor for the Fed
One of the forces propping up the economy, and the stock market, is the huge investment that tech companies are making in artificial intelligence.
Warsh is generally bullish about the prospects for AI, believing it will eventually make workers more productive. But the growth of data centers is also putting upward pressure on the price of building materials and electricity and computer chips. And there's considerable uncertainty about how AI will affect workers.
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"Over the long term, my best guess is this will improve the real wages and will help us on full employment," Warsh said at the Congressional hearing. "But between the short-term and the long-term, it can have a disruptive effect."
Artificial intelligence is the focus of one of several task forces that Warsh established to advise the central bank. The task forces, which are led by economists and business people from outside the Fed, are expected to make recommendations by the end of this year.
