Federal Reserve Chairman Kevin Warsh addressed key economic and policy developments during a European Central Bank event in Sintra, Portugal. Inflation risks have declined, Warsh stated, citing a drop in energy prices following the U.S.-Iran memorandum of understanding. However, he emphasized that the Fed still has work to do to control rising prices, which remain a concern for Americans. The Fed's balance sheet policy will be well-communicated and deliberated publicly before any changes are implemented, Warsh assured. He reiterated his belief that the central bank's balance sheet, currently at $6.7 trillion, should be smaller but acknowledged that adjustments will take time.
Warsh also discussed the impact of artificial intelligence (AI) on the economy, noting that AI-driven capital expenditures are boosting demand. He expressed confidence that AI will eventually enhance supply-side productivity. Despite these insights, Warsh declined to speculate on future interest rate decisions, stating that the Fed will limit communications about its future plans.
The Fed's balance sheet has grown significantly over the past two decades, reaching a peak of $9 trillion in 2022. Warsh, who returned to the Fed in May, has been critical of the expansive size of the balance sheet, which he views as bordering on fiscal policy. Economists and some Fed officials believe the central bank can shrink its holdings by reducing banks' reliance on emergency liquidity, though this could have broader market implications.