Fed Chair Warsh Clashes With Lawmaker Over AI Role, Signals Regulatory Hands-Off Approach

Federal Reserve Chair Kevin Warsh on Tuesday rejected calls for the central bank to take an active role in artificial intelligence policy, telling the House Financial Services Committee that directing AI investment or industrial policy falls outside the Fed's mandate.

The exchange, reported by indiatimes.com, saw Rep. Stephen Lynch challenge Warsh over the Fed's approach to AI, warning the U.S. risks falling behind in the global AI race. Warsh pushed back, arguing "it's not the central bank's job" to steer AI investment, stressing the Fed's mandate is limited to monetary policy and financial stability.

The clash highlights a growing debate over AI regulation, economic competitiveness, and the future of U.S. technology leadership, according to the report.

Warsh's stance comes as AI-related spending surges. Worldwide, companies spent around $1 trillion on data centers in 2025, a figure expected to quadruple by 2030, according to a Nasdaq report citing industry estimates. The top 10 largest companies in the S&P 500 now account for over 40% of the index's total value, with most heavily invested in AI.

**Inflation and AI Price Pressures**

During two days of congressional testimony, Warsh acknowledged that AI-driven investment would likely increase "measured prices" over the next 12 months, but he drew a distinction between higher prices and inflation.

"I don't view a one-time change in prices as necessarily being inflationary, because I think there's a supply response," Warsh said, according to an ABC News report. "Will it increase measured prices over the course of the next 12 months? I suspect it will be. Whether that's inflationary or not, that's up to the Federal Reserve, and we're going to have something to say about that."

Warsh's comments came as government data showed consumer inflation cooled to 3.5% in June from 4.2% in May, and wholesale inflation also slowed. He downplayed the positive data, calling the measures "imperfect" and pointing to a task force he has created to study the sources of data the Fed uses.

The Fed chair's reluctance to provide clear guidance on rate policy has frustrated markets and some lawmakers. During a Senate Banking Committee hearing Wednesday, he repeatedly declined to specify what conditions would trigger a rate change. When pressed by Senator John Kennedy, Warsh said the Fed would "look at our tools and the changing economy, both balance sheet and interest rate, and see whether we need to adjust policy," according to a Reuters report published by wkzo.com.

**Divisions Within the Fed**

Warsh's colleagues have been more forthcoming about their own policy leanings. Fed Governor Lisa Cook told the Exchequer Club of Washington on Wednesday that she sees risks of higher inflation from the AI investment boom, tariff pressures, and the Middle East conflict. "If we do not see signs of disinflation soon, I am prepared to act," Cook said, a reference to a possible rate hike, Reuters reported.

New York Fed President John Williams offered a more sanguine view, saying inflation is "unquestionably too high at about 4%" but that there are "encouraging reasons to expect that inflation has peaked." He described policy as "well-positioned."

Fed Governor Christopher Waller said Monday he would need to see "several months" of easing inflation before feeling confident it is heading toward the 2% target, according to Reuters.

The Fed's quarterly dot plot in June showed half of Warsh's 18 colleagues expect a rate hike by year end. Warsh did not submit a dot of his own.

**Independence and Trump Ties**

Warsh repeatedly defended the Fed's independence during his testimony. "The independence of the Federal Reserve is sacrosanct," he said Tuesday, according to a CNBC report.

Pressed by Democratic Senator Chris Van Hollen on whether he had communicated with President Donald Trump since taking office, Warsh declined to answer directly. "I don't want to be in the business of sharing discussions that the president and I have," he said, according to multiple reports. He added that he has told Trump and Treasury Secretary Scott Bessent: "They chose an independent guy to do an independent job, and that's exactly what I plan on doing."

Warsh confirmed he meets weekly with Bessent and talks to him "often between that," CNBC reported. He also said he feels comfortable receiving calls from the president, though he indicated Trump has not tried to influence monetary policy.

Trump has repeatedly called for lower interest rates. Economists and investors have predicted the Fed may have to raise rates this year due to inflationary pressures from higher energy costs and AI infrastructure build-out, according to a Business Standard report.

**Market Implications**

The CME Group's FedWatch tool estimates a nearly 90% chance that the Fed will raise interest rates by December 2026, according to a Nasdaq report. Higher rates could particularly impact tech stocks, which have driven much of the recent market gains. The S&P 500 is up 22% and the Nasdaq Composite up 28% over the past 12 months.

Warsh has urged markets to focus on economic data rather than Fed pronouncements. "Play the ball, not the Fed," he said, according to Reuters. But his colleagues appear to disagree. New York Fed President Williams said Wednesday that policymakers need to connect the dots between their economic outlooks and rate expectations, a view shared by Governor Waller.