• Fed Chair Kevin Warsh expects third-quarter GDP growth to exceed 3%, reinforcing economic resilience but complicating the inflation fight.
  • The forecast comes ahead of Thursday's advance GDP estimate, with economists sharply divided after September's goods trade deficit widened to a record $134.9 billion.
  • The Fed held rates steady at 3.75%–4.00% today, with two dissents favoring another hike.

A Strong Call, But Not Yet Data

Federal Reserve Chair Kevin Warsh said Wednesday that U.S. third-quarter economic growth likely exceeded 3%, according to people familiar with the matter, a forecast that underscores the economy's surprising resilience but could complicate the central bank's battle against elevated inflation. The remark, made on the sidelines of the Fed's policy meeting, lands just a day before the government's first estimate of third-quarter GDP, due Thursday at 8:30 a.m. ET.

Warsh's projection puts him at odds with a growing chorus of economists who have trimmed expectations following a sharp deterioration in the trade balance. September's goods trade deficit ballooned to $134.9 billion as imports hit a record, driven in part by a surge in capital-goods shipments tied to the artificial-intelligence buildout. After incorporating that report, Pantheon Macroeconomics economist Oliver Allen said growth "around 1%" appeared more likely, while acknowledging unusual uncertainty.

Ahead of the trade figures, economists surveyed by Reuters (TRI) had expected third-quarter growth of 3.2% annualized, up from 2.2% in the second quarter. Consumer spending and AI-related investment were seen as the main drivers. But the import surge has muddied the waters. "The trade drag can coexist with strong business investment and consumer demand," said Nationwide economist Daniel Vielhaber. "It is not necessarily evidence of domestic weakness."

A Divided Fed Holds Steady

The Fed earlier today left its benchmark rate unchanged at 3.75%–4.00%, following September's quarter-point increase. The vote was 10–2, with Governor Lisa Cook and Cleveland Fed President Beth Hammack preferring another quarter-point hike. In its statement, the committee upgraded its description of economic activity from "solid" to "strong" while continuing to call inflation "elevated."

The decision comes less than a week before the U.S. midterm elections, with affordability a central concern for households. President Trump and his advisers have publicly pressured the Fed to refrain from further tightening. Warsh, who became chair in May, has made inflation control a priority, and today's pause follows September's first rate hike since 2023—a signal that officials are not yet declaring victory.

Market reaction to the rate decision itself was muted, with stocks and bonds little changed. Investors are now leaning toward another increase in January rather than December, according to futures pricing, though a strong GDP print could revive expectations for an earlier move. In a CNBC (VSNT) survey conducted October 27, 76% of respondents expected a December hike.

AI Investment: Growth Engine and Import Driver

The AI investment boom has been a double-edged sword. On one hand, stronger core capital-goods orders and shipments in September pointed to robust equipment investment in the third quarter. FWDBONDS chief economist Christopher Rupkey argued that the investment boom could keep growth running with a "3% handle," though he stressed that not everyone is participating.

On the other, much of the hardware needed for AI infrastructure is imported. Capital-goods imports rose 7.5% in September and 77.2% from a year earlier, contributing to the trade gap. That dynamic helps explain how the economy can post strong underlying demand while headline GDP disappoints.

The uneven nature of the expansion is also a political flashpoint. Wage gains have lagged price increases, and higher mortgage and consumer-loan costs continue to strain household budgets. Affluent households' wealth-supported spending and the AI buildout have been major growth contributors, according to Axios, but the benefits are not broadly shared.

What to Watch

Thursday's GDP report will be scrutinized not just for the headline number but for its composition. A print near the 3.2% consensus would mark the strongest quarterly growth since the third quarter of 2025 and could bolster the case for further tightening if inflation remains stubborn. Conversely, a reading closer to 1% would validate the trade drag and raise questions about the durability of the expansion.

The same morning brings September's personal-income, spending, and PCE inflation data—key inputs for the Fed's outlook. With Warsh's forecast now on the record, the stakes for tomorrow's release are unusually high.

Correction: An earlier version of this article misstated the date of the Fed's September rate increase. It was the first hike since 2023, not 2022.