By Nick Timiraos
Kevin Warsh spent the past year constructing a case for the Federal Reserve to deliver the interest-rate cuts President Trump wants: An artificial-intelligence boom would soon deliver a productivity surge that would hold down prices.
When Warsh appears Tuesday in front of senators for the confirmation hearing that could put him one step closer to leading the central bank, his toughest audience could be his future colleagues. They have been delicately but unmistakably signaling their pointed skepticism.
If confirmed, he stands to inherit a Fed caught between a technological shift that has yet to hold prices down and a fracturing geopolitical landscape that keeps threatening to push prices up. The Iran war has been the most recent and sharpest example.
In the run-up to being chosen by Trump in January, Warsh's case had been straightforward: The economy would grow steadily on the back of AI, but slower inflation wouldn't show up in the official data for some time, creating a conundrum for evidence-based central bankers. "So they're going to have to make a bet," he said on a financial podcast last fall.
The economic logic works like this: AI makes existing workers more productive, so companies can pay workers more without raising prices. Or they can produce the same amount with fewer workers, lowering labor costs. Either would keep inflation in check and deliver room to cut rates without worrying about reigniting price pressures.
In a Fox Business interview last fall, Warsh signaled alarm that without the right leaders, the Fed wouldn't make that bold call. "What worries me, and I suspect what worries the president, is the Fed's going to make its sixth or seventh big mistake in the last six or seven years," he said. "They've got to allow" the productivity boom "to continue to lower prices, instead of saying, 'Oh my gosh, the economy's too strong. We better stop this.'"
Warsh and senior Trump administration officials have leaned repeatedly on one historical analogy to make the case: the Fed under Alan Greenspan in 1996 and 1997.
Back then, Greenspan held rates steady against colleagues who wanted to hike, wagering that a productivity boom driven by the internet revolution would keep inflation low even as growth accelerated. Inflation remained tame and the economy boomed, though the Fed ultimately reversed course and raised rates sharply in 1999 and 2000. The same technology boom that justified earlier patience gave way to fears of an overheating economy from the dot-com stock bubble.
Rates are set not by the Fed chair alone but by a 12-person group. A Fed chair's ability to move the Federal Open Market Committee rests heavily on accumulated standing -- something Greenspan had built over a decade by the time he made his productivity call. Warsh, who served as a governor from 2006 to 2011, would be starting from a different position.
"I don't think that Warsh walks in with that level of credibility," said former Fed Chair Janet Yellen at a conference last week. As a Fed governor in the 1990s, Yellen was one of the officials who challenged Greenspan. "I really don't see the FOMC accepting this in the short run, " she said.
Warsh's colleagues are wary of the analogy because back then, the Fed was debating whether to hold rates or hike -- not cut. Inflation had fallen to 2% for the first time in decades and federal budget deficits were swinging toward a surplus. Today, inflation has been running above a 2% target for six years. Deficits, meanwhile, have soared to levels rarely seen outside wartime or recession.
The global economy was also providing help Greenspan's Fed didn't have to engineer. Cheap imports from an expanding world trading system put downward pressure on prices throughout the 1990s. The opposite force is at work today: Tariffs, deglobalization and conflict are disrupting supply chains and raising costs.
Several Fed officials have pointed out that AI today is mostly boosting demand -- fueling a boom in data-center construction, surges in electricity prices and buoyant stock markets that have, in turn, boosted consumer spending. That dynamic could put upward pressure on prices in the short run.
In that environment, easing rates on the promise of future productivity gains would be "risky," said St. Louis Fed President Alberto Musalem in a speech this month. He flipped Warsh's framing that the Fed's "antigrowth" tendency is to step on the productivity boom, arguing that the truly "pro-growth" stance is to keep inflation low.
If AI really does deliver a predicted productivity boom, it would likely raise over time the "neutral" interest rate -- the setting consistent with a balanced economy. Stronger future growth prompts more investment and less saving, which must be brought into balance via a higher neutral rate. If the neutral rate has moved up, keeping rates where they are means the Fed is doing less to restrain the economy than it was before.
Greenspan read the 1990s through firm-level data on companies using new technology -- retailers deploying inventory systems, truckers using GPS and manufacturers adopting computer-assisted design. Today, most of the anecdotes Warsh and his allies cite come from firms "producing the technology, not using the technology," said Vincent Reinhart, a former senior adviser to Greenspan who is now at BNY Investments.
James Bullard, a former St. Louis Fed president, put it more bluntly: Adoption won't happen "as fast as Silicon Valley would like it. Those guys are hyping their IPOs."
What Warsh tells lawmakers Tuesday will be the first signal of how much of his pre-nomination case has survived contact with the world he is about to enter. Warsh hasn't spoken publicly since Trump announced his nomination.
"There have been a series of shocks since he made these [arguments]," said James Egelhof, chief U.S. economist at BNP Paribas. "As with all experienced economists, we would expect Mr. Warsh to revise and update his views in response to surprises."
Even some of Warsh's supporters now say it isn't the moment to act. "Kevin's point is correct: There is no question AI could further a period of disinflation," said Joseph Lavorgna, who until recently served as a senior Treasury Department adviser and is now chief economist at SMBC Americas. But the Iran war has changed the equation. "The Fed should wait," he said.
Warsh has sounded more cautious in the past. In a 2023 op-ed, he pointed to the Fed's flawed inflation forecasts after the pandemic as evidence that "policymakers shouldn't bet all their chips on hopes for low prices or anything else."
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires
April 20, 2026 05:00 ET (09:00 GMT)
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