In recent years, productivity in the United States has experienced significant growth, as indicated by data. In the realm of economics, robust productivity allows for vigorous growth without igniting inflationary pressures — consequently, the Federal Reserve may refrain from implementing interest rate increases. The applicability of that same rationale to rate cuts remains uncertain. If confirmed by the Senate to lead the central bank following Chair Jerome Powell’s term expiration in May, Warsh will oversee a 12-member rate-setting committee that has exhibited significant divisions in recent months. Federal Reserve chairs are responsible for fostering agreement on interest rate decisions, where each member, including the chair, possesses a single vote. That implies Warsh must persuade his colleagues — several of whom remain apprehensive about inflation — that productivity driven by AI justifies further reductions in interest rates.
However, it is premature to assert that AI will enhance productivity in a sustainable manner, as indicated by the majority of economists, and certain influential monetary policymakers have already implied that it may not even justify a reduction in interest rates. During his tenure as a Fed governor from 2006 to 2011, Warsh was recognized for his “hawkish” stance, favoring policies aimed at curbing economic expansion and controlling inflationary pressures. He has since adjusted his perspective and is now more aligned with the Trump administration, which, in addition to advocating for lower rates, also posits that the US economy is experiencing a significant productivity boom, akin to that of the dot-com era. “It’s clear that we are at the nascent stages of a productivity boom, not unlike the 1990s,” Treasury Secretary Scott Bessent remarked in a recent interview. Kevin Hassett has similarly expressed that perspective. Several contemporary central bankers, including Fed governors Christopher Waller and Lisa Cook, along with Powell himself, have determined that AI possesses the capacity to markedly enhance productivity. Warsh contends that Fed policymakers ought to embrace the new technology with the same boldness they exhibited during the internet era under Fed Chair Alan Greenspan, advocating for a shift towards a more accommodative monetary policy. In his December interview, Warsh highlighted that Greenspan “believed based on anecdotes and rather esoteric data that we weren’t in a position where we needed to raise rates,” even though there were indications that the economy was heating up at that time. “As a result we had a stronger economy, we had more stable prices,” Warsh stated.
Productivity is often comprehended more effectively in hindsight, yet Greenspan determined that policymakers ought to allow the economy to operate at full capacity, as various anecdotes indicated robust productivity bolstered by the internet. “Recognizing that the economy was in the early stages of a productivity boom helped the Greenspan-led Fed hold off on interest rate hikes in the 1990s,” stated Michael Pearce. “However, it did not constitute a rationale for reducing rates into accommodative territory,” he stated. Strong productivity leading to reduced borrowing costs may present a challenging argument for certain Federal Reserve policymakers. Cleveland Fed President Beth Hammack, a voting member on policy decisions this year, stated in a December interview. “That could be more upward biased, if is having more material productivity impact,” Hammack stated, expressing her concerns regarding 2026 potentially marking the fifth consecutive year of elevated inflation. A higher neutral rate suggests that the economy is capable of enduring elevated interest rates, presenting a direct challenge to the substantial rate reductions advocated by the Trump administration.
Dallas Fed President Lorie Logan, a voting member of the Fed this year, shared a collection of anecdotes in a 2024 speech illustrating how AI is boosting productivity for businesses across various sectors. However, akin to Hammack, Logan is characterized by economists as a hawk, remaining vigilant regarding inflation, and has indicated that she would have opposed the Fed’s decision to reduce rates in December. “Productivity is an important and powerful force, but it’s one of the great unknowns of economics,” stated Josh Jamner. “Many individuals draw parallels to the late 90s; however, a closer examination reveals that there was a significant degree of labor-force expansion occurring during that period. Currently, we face an aging population coupled with changes in immigration policy that have complicated labor-force growth. While there are parallels to the 1990s, it is crucial to recognize the significant differences as well,” he added.