Why Economists Are Rejecting Kevin Warsh's AI-Powered Rate Cut Theory

Fed board candidate Kevin Warsh believes AI will boost productivity so dramatically that it'll pave the way for interest rate cuts. Mainstream economists aren't buying it.

The Great AI Productivity Bet

Warsh's argument sounds seductive: artificial intelligence will revolutionize productivity, reduce inflationary pressures, and give the Federal Reserve room to cut rates. It's the 1990s internet boom playbook all over again—technology drives efficiency, efficiency tames inflation, and everyone wins.

But here's where reality gets messy. Leading economists are pushing back hard against this narrative, and their skepticism runs deeper than mere academic caution.

Stanford'sErik Brynjolfsson, a leading authority on technology and productivity, argues that AI's economic impact will be gradual, not immediate. "We're still in the early stages of understanding how AI translates into measurable productivity gains," he notes. The data backs him up: despite massive AI investments, productivity growth remains stubbornly modest.

The Numbers Don't Add Up Yet

U.S. nonfarm productivity grew 2.7% in 2023, but economists warn this could be a statistical blip rather than the start of an AI-driven productivity revolution. Historical precedent suggests caution—it took nearly a decade for internet technologies to show up meaningfully in productivity statistics.

Meanwhile, AI investments themselves are creating inflationary pressures. NVIDIA's meteoric rise and the data center construction boom are driving up asset prices and resource costs. The very companies betting big on AI are also contributing to the inflation that Warsh believes AI will solve.

Goldman Sachs economists recently estimated that AI could boost productivity by 1.5% annually over the next decade—significant, but hardly the game-changer that would justify immediate monetary policy shifts.

The Fed's Dilemma

The Federal Reserve faces a complex calculus. While AI promises long-term productivity gains, the immediate economic reality includes:

• Massive capital expenditures on AI infrastructure
• Labor market disruptions that could create short-term inefficiencies
• Asset price inflation driven by AI speculation
• Uncertain timelines for productivity payoffs

Jerome Powell and his colleagues must navigate between technological optimism and monetary policy pragmatism. The risk of cutting rates based on speculative productivity gains could reignite inflation—exactly what the Fed has been fighting to contain.

Winners, Losers, and Unintended Consequences

If Warsh's theory proves correct, tech companies and AI-heavy sectors would benefit enormously from lower borrowing costs. But traditional industries might find themselves squeezed by both technological disruption and continued economic uncertainty.

For investors, the stakes are enormous. Betting on AI-driven rate cuts means believing that technology will overcome fundamental economic forces faster than historical precedent suggests. It's a wager that requires faith in exponential change rather than incremental progress.

The global implications are equally complex. If the U.S. cuts rates based on AI productivity assumptions, other central banks face pressure to follow suit—regardless of whether their economies are experiencing similar technological transformations.