Warsh's Patience Runs Out as US Economy Roars

The US economy is experiencing record corporate profitability and accelerating AI investment, which are lifting growth but also shortening Kevin Warsh's patience with inflation. After-tax corporate profits have risen to $4 trillion at an annualized rate, a 20% increase from last year and a record 12.1% of GDP.

AI capital spending is becoming a key driver of the economy, with business equipment spending expected to rise 11% in 2026 and 7.5% in 2027. This growth has led BMO to lift its 2027 GDP forecast by two tenths to 2.2%, slightly above its estimate of the economy's long-term potential.

Federal Reserve member Kevin Warsh has expressed concerns that an economy with this much financial octane may not return inflation to 2% without additional pressure from the Fed. Following his recent speech at Jackson Hole, Fed funds futures lifted the probability of a September hike to around 58%, indicating a shift in the burden of proof for the Fed.