Trump’s Fed pick Kevin Warsh signals aggressive rate cuts fueled by AI productivity boom

Kevin Warsh, Donald Trump’s nominee to lead the Federal Reserve, has argued that American interest rates should be lower.

According to a report by the Financial Times (FT), Warsh believes that the primary driver for this shift is the artificial intelligence (AI) boom—which he considers “the most productivity-enhancing wave of our lives, past, present, and future.” He contends that this surge provides the Fed with the leeway to lower rates without fueling inflation.

The Fed nominee believes he can give these productivity gains a chance to flourish, much like former Chair Alan Greenspan did in the 1990s.

“Greenspan, based on anecdotal and quite esoteric data, didn’t think we were in a position where we needed to raise rates,” Warsh said during a December interview with Sadi Khan, CEO of Aven Financial. “As a result, we had a stronger economy and more stable prices.”

Warsh’s perspective is shared by other Trump administration officials, including Treasury Secretary Scott Bessent, who likewise favors the rapid and sharp interest rate cuts the president desires.

“It is clear that we are in the early stages of a productivity boom, similar to the 1990s,” Bessent told CNBC earlier this month. He added that observers should read the biography of Greenspan by former Washington Post journalist Bob Woodward, which details how the former chair “properly jump-started the economy.”

Greenspan’s pivotal move regarding productivity dates back to September 1996. At that time, Greenspan entered a Fed board meeting and attempted to persuade colleagues to postpone the rate hike that many of them sought.

He informed the Federal Open Market Committee (FOMC) that productivity was increasing faster than official data suggested.

“Many people weren’t entirely convinced; Greenspan began to explain certain aspects of productivity growth in a way that people really struggled to understand,” Janet Yellen, then-president of the San Francisco Fed, told the FT.

Yellen added that Greenspan was “absolutely right.” Ultimately, nearly every member of the FOMC, including Yellen—who would later become Fed chair—supported Greenspan’s productivity forecast and kept borrowing costs steady, though they pledged to raise them if inflation emerged.

Three decades later, Warsh believes he can repeat the master’s move. Jerome Powell, whom Warsh is set to replace, has also hinted at believing in at least some of the AI hype.

“When you look back, there will be some disruptions that come in waves, but ultimately, technology increases productivity, and that is the basis for rising wages,” Powell stated in January.

On Wednesday evening, Fed Governor Lisa Cook echoed this sentiment, noting, “Growing evidence suggests that AI has the power to significantly increase productivity.”

Vincent Reinhart, a former Fed official who attended FOMC meetings, agrees that there is a “compelling direction” suggesting AI will increase productivity and lower inflation over time.

However, Reinhart—now chief economist at BNY Investments—noted that while the technology “certainly bends the path upward for expected output,” it is currently “contributing very little to productivity.”

Many economists believe the AI boom is currently driving demand rather than expanding the US economy’s supply capacity. They point to the surge in capital investments and stock market gains, which benefit the wealthiest Americans and boost spending.

Warsh predicts that the AI boom will rapidly disrupt the business world, and that the best companies will be doing “unimaginable things” within a year.

As a researcher at Stanford University’s Hoover Institution, Warsh has had a front-row seat to the evolution of the AI industry.

His mentor, Stanley Druckenmiller, said that Warsh’s time managing private equity investments—mostly involving tech companies—at the billionaire’s family office has placed him in an ideal position to evaluate the technology’s impact on the economy.

Speaking to the FT about Silicon Valley, Druckenmiller said:

“He has a great network there, and because he possesses not just high-level information but also the details of AI’s speed and disruptive impact, I think he has a better understanding than a normal macroeconomist.”

If the Senate confirms Warsh in a timely manner, the Fed chair nominee will take office in mid-May. He will immediately face pressure to implement significant rate cuts from the current 3.5-3.75% range ahead of the midterm elections in November.

Recent policy forecasts from Fed officials indicate they intend to cut US borrowing costs only once this year, keeping the benchmark rate above 3.25%—well above the 1% level desired by the president.

Those present during the September 1996 vote say Greenspan relied on data, not just anecdotes, to convince the committee.

If Warsh wants to convince today’s rate-setters of an AI-driven productivity boom, he will need to do the same.

“Greenspan’s intuition was supported by deep research, uncovering things other people couldn’t find,” said former Fed Vice Chair Don Kohn, who attended the meeting as FOMC secretary. “He is someone who places great importance on data. This wasn’t just a claim; wages were rising, profits were high, and inflation was low—there was a puzzle to be solved.”

Yellen noted, “Greenspan did a lot of research on his own. Using a vast amount of economic data, he truly tried to prove this thesis.”