New economic data challenges Fed chief’s not-too-hot perspective
Recent data may challenge investment have pushed growth beyond the levels most <a too hot." He added that he did not want "to throw sand in the gears" of an expansion currently fueled by artificial intelligence investment and consumer spending that persists despite modest income growth.
The Commerce Department reported Thursday that third-quarter gross domestic product growth exceeded expectations, with an annualized rate of 3.4% for the July-September period. This was driven by a 3.8% increase in consumer spending and a significant 20.9% surge in business equipment investment.
This momentum may be temporary. For instance, the GDP report showed consumer spending outpacing income growth, a trend many economists view as unsustainable. Warsh noted Wednesday that recent tightening in credit markets suggests investors have become “more discerning in their capital allocations,” which could signal a future slowdown in investment.
Nevertheless, current data indicates an economy that has yet to cool despite expectations for tighter monetary policy, with high demand now accompanied by widespread inflation.
Various metrics regarding the breadth of inflation indicate that between 50% and 60% of items in the Personal Consumption Expenditures Price Index—the Fed’s preferred gauge for its 2% inflation target—saw annual price increases exceeding 3% in September. This remains well above pre-COVID-19 levels for a measure Warsh considers a reliable indicator of underlying inflation trends.
Although the number of items exceeding that 3% threshold dipped slightly last month, KPMG chief economist Diane Swonk noted that the PCE report details reveal inflation remains broadly persistent throughout the economy, particularly within service sectors where Fed rate hikes may have less influence.
The PCE Price Index climbed 3.6% in September, following a 3.4% increase the previous month. This moves the index further away from the recent low of 2.3% recorded in March 2025, near the beginning of President Donald Trump’s second term.
Swonk remarked that while she believes Fed policymakers should have increased rates this week, she understands the desire for patience, noting that “they don’t want a recession for 3% to 4% inflation” if they can address the issue gradually while maintaining the current expansion—a goal Warsh articulated during his press conference.
