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.

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 traded near $4,000 an ounce, while silver, at about $57, has fallen roughly 25% over the past month after rising sharply, according to market data. Bitcoin held near $62,000.

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.