Warsh's Fed Weighs Whether AI Justifies Easier Money

The Economist examined whether artificial intelligence (AI) will lower interest rates, reporting that Federal Reserve Chair Kevin Warsh is drawing lessons about technology from former chair Alan Greenspan, but selectively. In the late 1990s, Greenspan judged that rising productivity from new technology allowed the economy to grow faster without higher inflation, and he held rates lower than many expected. The question now is whether AI-driven productivity supports a similar argument, or whether it merely justifies looser policy.

The debate matters because Warsh has signaled a more hawkish stance and a move away from explicit forward guidance. A Bank of America note warning of possible rate increases contributed to the equity selloff earlier this week, which shows how sensitive markets remain to the direction of policy. On June 25 the Bureau of Economic Analysis reported that the inflation gauge the Federal Reserve watches most closely (the PCE price index) rose to a 4.1% annual rate in May, the highest since April 2023, with the core measure that excludes food and energy at 3.4%, the highest since October 2023. CBS News reported it was the fastest pace of price increases in three years. The data hardened the case for higher rates, and money markets moved to price a near-certain quarter-point increase by October.

Investors are responding by reassessing the balance between paper and hard assets. The Israeli outlet Globes published guidance from veteran analyst Tzvi Stepak on how much of a portfolio to hold in dollars and gold amid market volatility. Gold rebounded above $4,000 an ounce after the inflation data, recovering from an eight-month low, while silver, at about $57, has fallen roughly 25% over the past month after rising sharply, according to market data. Bitcoin fell roughly 5% after the PCE release to its lowest level in 21 months, trading near $58,000.

From a sound-money view, the productivity argument carries a risk. If the central bank treats a technology boom as justification for cheaper credit, it can produce the asset inflation and malinvestment that later correct. Greenspan's low-rate period preceded the collapse of the dot-com bubble, a precedent Warsh appears to be studying carefully.