Growth ran at 3.4 percent and inflation broadened in September, testing the Fed chairman's case for patience

The numbers that arrived on Thursday do not fit the word patient. The Commerce Department said gross domestic product grew at a 3.4 percent annualized rate in the July to September quarter, faster than economists expected. Consumer spending rose 3.8 percent. Investment in business equipment rose 20.9 percent, driven by the artificial intelligence build out that has carried much of this expansion.

Inflation moved the wrong way at the same time. The Personal Consumption Expenditures price index rose 3.6 percent in September from a year earlier, after a 3.4 percent rise the month before, as of October 30. That is further from the recent low of 2.3 percent in March 2025. Measures of breadth show roughly 50 to nearly 60 percent of the items in the index posting annual increases above 3 percent, well above the pattern before the pandemic. Diane Swonk, chief economist at KPMG, said the details showed inflation broadly persistent across the economy, particularly in services, where rate increases bite more slowly. The Fed is looking behind the curve, she said.

Chairman Kevin Warsh laid out the other reading on Wednesday, after the rate setting committee voted 10 to 2 to hold the benchmark rate at 3.75 to 4 percent. He said he did not think the economy was too hot, and that he did not want to throw sand in the gears of an expansion gaining steam on AI investment and consumer spending that keeps growing despite tepid income gains. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented. They wanted a quarter point increase now.

Warsh argued that nobody can measure the economy's noninflationary speed limit precisely, and that productivity gains from AI may be raising it. The third quarter pace, sustained, would sit above even the most optimistic long run estimate any Fed policymaker published in September, which topped out at 2.5 percent against a median of 2 percent. Vincent Reinhart, chief economist at BNY Investments and a former head of the Fed's monetary affairs division, said Warsh is painting the most optimistic picture available, and that the central bank will likely have to raise rates twice more, with the risk decidedly toward more, particularly while the benchmark oil price sits near 115 dollars a barrel.

The next meeting is December 8 and 9. Markets put roughly 80 percent odds on a quarter point increase at that session, as of October 30, with further tightening expected next year. Consumer spending also grew faster than income in the third quarter report, a pattern economists say rarely lasts, and Warsh pointed to a recent tightening in credit markets as a sign that investors have grown more discerning. Both readings are now on the table. The data in hand show an economy that has not slowed.