Market misunderstanding? Wosh's true benchmark: Greenspan

As a candidate nominated by Donald Trump for Federal Reserve Chair, former Fed Governor Kevin Warsh is attempting to replicate Alan Greenspan’s monetary policy legend of the 1990s by betting on the productivity boom brought about by artificial intelligence (AI).

According to macro analyst Claire Jones, Warsh’s core logic is that the AI wave will significantly boost productivity, creating room for the Federal Reserve to cut interest rates substantially without triggering inflation.

Warsh believes this round of AI enthusiasm is the “most productivity-enhancing wave that this generation has seen in its lifetime—past, present, and future.” This view is supported by Trump administration officials like Treasury Secretary Scott Bessent, who, like the president, hopes to see interest rates fall rapidly. Bessent openly states that we are currently in the early stages of a productivity boom similar to the 1990s, and the economy can operate on the basis of low interest rates.

His approach is seen as an attempt to recreate Greenspan’s 1990s monetary policy legend—when Greenspan relied on intuition and complex data to delay rate hikes, ultimately fostering a strong economy and stable prices. Jones believes Warsh trusts that he can similarly leverage this logic, taking on the risk of productivity expectations to push interest rates downward.

However, the economics community is not without doubts. Several economists warn that if the immediate effects of AI are demand surges rather than a simultaneous expansion of supply capacity, aggressive rate cuts could ignite inflation before the productivity dividends materialize. If Warsh aims to implement rate cuts quickly after taking office in mid-May, he will face a tight political timetable and must, like Greenspan, present convincing data to persuade the Federal Open Market Committee (FOMC).

Recreating the 1990s “Productivity Miracle”

Warsh is looking to historical lessons from 30 years ago. In a previous interview, he stated that Greenspan, based on anecdotal evidence and unconventional data, judged that the U.S. economy did not need rate hikes, a decision that proved correct in the end. Warsh believes current AI technology gives the Fed a chance to repeat this “stroke of genius.”

This stance aligns closely with the policy goals of the Trump administration. Bessent recommends that observers revisit Greenspan’s biographies to understand how he correctly managed the economy in a hot state. Bessent notes that the current productivity boom is still in its infancy but provides a theoretical basis for policy adjustments.

If Warsh’s nomination is confirmed by the Senate, he will officially take over the Federal Reserve in mid-May. He will then face immense pressure to sharply cut rates from the current 3.5%-3.75% range before the midterm elections in November. In contrast, Fed policy forecasts only anticipate one rate cut this year, keeping the benchmark rate above 3.25%, far from Trump’s desired 1% level.

Confidence from Silicon Valley

Warsh’s optimistic outlook on AI productivity largely stems from his deep ties to Silicon Valley. As a researcher at Stanford University’s Hoover Institution, he has closely observed the evolution of the AI industry. Warsh predicts that the AI boom will rapidly disrupt the workplace, with top companies achieving “unimaginable” transformations within a year.

His mentor, billionaire Stanley Druckenmiller, told the Financial Times that Warsh, during his management of family office private equity investments (mainly in tech companies), developed a profound judgment about technology’s impact on the economy. Druckenmiller believes Warsh has a vast network, understanding not only macro trends but also the speed and disruptive potential of AI development, giving him a deeper insight than typical macroeconomists.

Current Federal Reserve officials also hold an open attitude toward AI’s potential. Fed Chair Jerome Powell and Board Member Lisa Cook recently acknowledged that AI will ultimately boost productivity and lift wages, although this impact may come with initial disruptive effects.

Inflation Concerns: Demand Before Supply

Despite the optimistic vision, there is disagreement within the economics community about whether AI can deliver on its productivity promises in the short term. Former Fed officials and current Chief Economist at BNY Mellon Vincent Reinhart points out that while AI undoubtedly raises expectations for future output, it “has not yet contributed significantly to productivity increases.”

Many economists worry that the current AI boom is mainly boosting demand rather than expanding the supply capacity of the U.S. economy. Chicago Booth School of Business professor Anil Kashyap warns that if current spending—such as soaring capital investments and consumer spending driven by stock market gains—lags behind productivity gains, it could lead to inflationary pressures.

James Knightley of ING also states there is no evidence yet of a productivity revolution in the next two years unless the labor market experiences real pain. Nobel laureate Daron Acemoglu bluntly says, “Neither economic theory nor data” support the bullish optimism of tech enthusiasts.

Data Challenges: The Real Lesson from Greenspan

Warsh’s attempt to replicate Greenspan’s success faces the biggest challenge of convincing current Fed decision-makers. According to those who experienced the September 1996 FOMC meeting, Greenspan’s ability to persuade colleagues like Janet Yellen relied not only on intuition but on solid data.

Former Fed Vice Chairman Don Kohn notes that Greenspan was highly data-driven; his intuition was backed by uncovering deep insights others missed—such as when wages rose, profits soared, and inflation remained low, which was itself a puzzle. Yellen recalls that Greenspan conducted extensive research, using large amounts of economic data to support his views.

This means that if Warsh wants to promote his “AI productivity boom” theory at future rate-setting meetings, he cannot rely solely on Silicon Valley anecdotes. Like Greenspan, he must present the committee with concrete, actionable economic data to demonstrate that rate cuts will not reignite inflation.