Ex-Fed Governor Suggests AI Could Lower Interest Rates
Former Federal Reserve governor Kevin Warsh has suggested that widespread adoption of artificial intelligence could create deflationary pressures, potentially helping the central bank lower interest rates in the future. The view is reportedly already prompting debate within the Fed.
- The core of the argument is that AI could trigger a massive productivity boom, allowing companies to produce more goods and services at lower costs. This increase in supply would naturally push down prices, creating a disinflationary or deflationary effect. - Kevin Warsh, who served on the Fed's Board of Governors from 2006 to 2011, has been a vocal proponent of this view, arguing in a November 2025 Wall Street Journal op-ed that AI will be a "significant disinflationary force." He has been nominated by President Donald Trump to succeed Jerome Powell as Fed Chair. - This perspective draws parallels to the 1990s under then-Fed Chair Alan Greenspan, who held off on raising interest rates, correctly betting that the productivity gains from the computer and internet revolution would keep inflation in check. - However, there is significant debate on this topic within the central bank. San Francisco Fed President Mary Daly has stated that most macroeconomic studies show "limited evidence of a significant AI effect" on productivity so far. - Similarly, Fed Governor Michael Barr has argued that the surge in AI development is unlikely to justify lowering interest rates in the near future, pointing to the potential for increased business investment to actually raise the demand for capital. - The economic impact is uncertain because while productivity gains can increase supply (disinflationary), the large-scale investment required for AI adoption and higher incomes could also boost demand and lead to inflation. The net effect depends on which of these forces is stronger and when they materialize. - Some economists and tech leaders, like ARK Invest CEO Cathie Wood, are even more bullish, predicting that AI and other technologies could push inflation to zero or even into negative territory. On the other hand, a survey of 45 economists revealed that 56% believe AI's impact on rate decisions will be limited for now. - The debate also considers AI's effect on the labor market. While AI could displace workers and constrain labor supply in the short term, potentially pushing up costs, it could also make human labor more scalable and efficient in the long run, adding to the deflationary pressure.
