"AI boom could enable rate cuts"—economists push back on Warsh’s claim, with 60% saying the impact would be minimal

Most economists said Kevin Warsh, the nominee to be the next chair of the U.S. central bank (Fed), is unlikely to be able to deliver on his claim that productivity gains from the artificial intelligence (AI) boom will open the door to interest-rate cuts.

According to the Financial Times on the 8th (local time), a survey of 45 economists conducted by the Clark Center for Global Markets at the University of Chicago found that 56% of respondents judged the AI boom would only lower the personal consumption expenditures (PCE) inflation rate and the neutral rate by less than 0.2% point over the next two years. Another 32% said the AI boom could instead raise the neutral rate by 0.2–0.5% point.

The findings run counter to Warsh’s argument. Warsh has said that “AI will unleash the greatest wave of productivity improvements of our lifetimes—past, present, and future,” and has argued that if the AI boom expands output, it could create room to cut the policy rate without stoking inflation.

Some Fed officials and economists, however, say that while AI may ultimately lift productive capacity substantially, it will increase inflationary pressures in the near term. Fed Vice Chair Philip Jefferson said at an event hosted by the Brookings Institution on the 6th, citing the data-center construction boom, that “demand tied to AI-related activity will rise more immediately,” adding that “without offsetting monetary policy, it could temporarily raise inflation.”

The FT said “these differences in views mean it will be tricky for Warsh to win support from Federal Open Market Committee (FOMC) members” for rate cuts, and that “it could become harder to deliver the scale of cuts U.S. President Donald Trump wants ahead of the November midterm elections.” Trump has been pressuring the Fed to lower the policy rate to around 1% per year before the midterms, but the Fed has maintained a cautious stance on easing. The median dot plot released after the December FOMC meeting last year showed FOMC members projecting one rate cut this year and one next year.

Warsh has also argued that the Fed’s balance sheet is too large and should be reduced, and three-quarters of survey respondents expected him to achieve that goal—implying the Fed’s balance sheet could move back toward below US$1 trillion, near pre-2008 financial crisis levels. If the process is pursued aggressively, however, long-term rates could rise, pushing up mortgage rates. An increase in voters’ homebuying burden is among the risks the White House is wary of heading into the election.

Critics also warn that Warsh’s two conflicting policies—cutting short-term rates while shrinking the Fed’s balance sheet—could sow confusion in markets.

Reporter: Hankyung (hankyung@hankyung.com)