Analysts say Kevin Warsh’s AI and Greenspan rate analogy is weak

In short: Kevin Warsh is arguing that AI will hold down inflation and let the Fed keep interest rates lower, but economists and some Fed officials say the evidence is shaky.

What's going on

Kevin Warsh has been pointing to the late 1990s, when Fed Chair Alan Greenspan believed new technology was raising productivity. Productivity is how much the economy can produce with the same workers and machines. Warsh says AI could create a similar boost, which would make prices rise more slowly and allow lower interest rates.

Recent analysis argues the 1990s story is not that simple. Some researchers say inflation fell back then largely because oil and other raw materials got much cheaper, and because globalization was strong. Globalization, in this case, means more production moved around the world, often to cheaper places, which can hold prices down. Economists also say the world has changed since then, with global trade and politics looking less supportive of low prices.

Several current indicators also cut against the idea that AI automatically means lower rates. One research note argues that if AI makes businesses invest heavily in short-lived equipment (like computers that need replacing every few years), that can push interest rates up over time, not down. Market pricing also suggests people still expect inflation to stay around the Fed’s 2 percent goal, rather than falling because of AI.

What to watch

Fed Governor Michael Barr has said AI is not likely to justify big rate cuts soon. A key question is whether AI lowers costs faster than it boosts spending, since more data centers, chips, and electricity demand can add price pressure (like adding lanes to a highway while also sending more cars onto it).

Source: NYTimes