①The “AI rate cut theory” of Kevin Warsh, the next Federal Reserve “leader,” which posits that AI will bring a productivity surge in the short term sufficient to support the U.S. in lowering interest rates, has been questioned and criticized by many economists; ②This highlights the challenges Warsh will face after taking over the Federal Reserve.
Kevin Warsh, the next Federal Reserve “leader” nominated by U.S. President Trump, has had his views scrutinized by many experts even before assuming office.
Among these, the “AI rate cut theory”—which posits that AI will bring a productivity surge in the short term sufficient to support the U.S. in lowering interest rates—has been questioned and criticized by many economists. This highlights the challenges Warsh will face after taking over the Federal Reserve.
Warsh believes that artificial intelligence will significantly enhance productivity, thereby allowing borrowing costs to be reduced without triggering inflation. However, an instant survey conducted by the Clark Center for Financial Markets at the University of Chicago among economists found that most respondents believe there is currently no evidence that AI can produce such significant effects within the next two years.
Among the 45 respondents, nearly 60% believed that the short-term impact of artificial intelligence on inflation and the neutral interest rate would be negligible, with a maximum reduction of only 0.2 percentage points for both. Some economists stated that AI is unlikely to become a significant driver of inflation rollback in the short term, nor does it pose a major risk of causing inflation.
Approximately one-third of the respondents went further, stating that faster growth driven by artificial intelligence might actually slightly push up the neutral interest rate, making the rationale for rate cuts more complex rather than strengthening the case for rate cuts.
This skepticism has also spread within the Federal Reserve.
Philip Jefferson, the Federal Reserve’s Vice Chair for Monetary Policy, recently warned that even if artificial intelligence eventually boosts the economy’s production capacity, the surge in investment and demand related to technologies such as data centers could temporarily push up prices unless monetary policy takes restrictive measures.
In this context, Warsh may find it difficult to convince the Federal Open Market Committee (FOMC) to implement the aggressive easing policy that Trump has consistently advocated before the midterm elections. The Fed’s current projections indicate only a 0.25 percentage point rate cut this year, meaning interest rates would remain far above the level Trump claims the economy needs.
Balance sheet reduction
On the other hand, Wash's stance on the Federal Reserve's balance sheet has also sparked controversy. He criticized the Fed for having an overly large asset scale, despite the fact that the Fed had just concluded a multi-year balance sheet reduction program, bringing its balance sheet size down to approximately $6.6 trillion.
Market concerns arose that further aggressive tightening of liquidity could push up long-term Treasury yields and mortgage rates, conflicting with the White House’s concerns about housing affordability.
Nevertheless, more than three-quarters of surveyed economists indicated they expect the balance sheet to fall below $6 trillion within two years.
Karen Dynan, a professor at Harvard University, stated that a cautious reduction in scale is reasonable as long as financial markets remain liquid and financing conditions are stable.
Uncertain Outlook
Others were less certain how Wash’s seemingly contradictory stance—enthusiastic about rate cuts but hawkish on the balance sheet—would ultimately translate into actual policy. Jane Ryngaert, a professor at Notre Dame, noted that given numerous variables, the outlook is exceptionally difficult to predict.
Some economists also emphasized that the final outcome may vary significantly depending on developments in artificial intelligence, fiscal policy, and financial markets.
Robert Barbera, a professor at Johns Hopkins University, stated that the U.S. economy could either enter a virtuous cycle of accelerated growth and smoother balance sheet reduction or face market turmoil, forcing rates back near zero and restarting large-scale asset purchase programs. Both scenarios are possible.
Finally, the surveyed economists also expressed resistance to another aspect of the Trump-Wash agenda: bank deregulation. The majority said that easing financial regulations would do little to promote economic growth in the short term but would significantly increase the risk of another financial crisis.
Editor/Doris
