Did the market misunderstand? The true benchmark of Wosh: Greenspan

As the Federal Reserve chair nominee appointed by Trump, former Fed governor Kevin Warsh is attempting to replicate Alan Greenspan's legendary monetary policy from 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 enhance productivity, thereby creating space for the Federal Reserve to cut interest rates sharply without triggering inflation.

Warsh believes that this round of AI enthusiasm is "the most productivity-enhancing wave that this generation has seen in their lifetime." This view is supported by Trump administration officials like Treasury Secretary Scott Bessent, who, like the president, hope to see interest rates decline rapidly. Bessent bluntly stated that we are currently in the early stages of a productivity boom similar to that of the 1990s, and the economy can "operate on this basis in a low-interest-rate environment."

Warsh plans to emulate Greenspan's strategy from 1996—when Greenspan relied on intuition and obscure data to delay interest rate hikes against the consensus, ultimately leading to a strong economy and stable prices. Warsh believes he can similarly take on the risk of productivity gain expectations to push interest rates down.

However, the economics community is not without its doubts. Several economists have warned that if the immediate effect of AI is a surge in demand rather than a simultaneous expansion of supply capacity, aggressive rate cuts could trigger inflation before the productivity dividend is realized. If Warsh is to implement rate cuts quickly after taking office in mid-May, he will need to face an urgent political timetable and must present convincing data to persuade the Federal Open Market Committee (FOMC), much like Greenspan did in his time.

Replaying the "Productivity Miracle" of the 1990s

Warsh is looking back at historical experiences 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 to raise interest rates, a decision that ultimately proved correct. Warsh believes that current AI technology gives the Federal Reserve the opportunity to repeat this "stroke of genius."

This position aligns closely with the policy demands of the Trump administration. Treasury Secretary Bessent has suggested that observers reread biographies about Greenspan to understand how he correctly kept the economy running hot. Bessent pointed out that the current productivity boom is still in its infancy, but this provides theoretical support for policy adjustments.

If Warsh's nomination is confirmed by the Senate, he will officially take over the Federal Reserve in mid-May. At that time, he will face immense pressure to significantly lower interest rates from the current range of 3.5%-3.75% before the midterm elections in November. In contrast, the Federal Reserve's current policy forecast indicates that there will only be one rate cut this year, with the benchmark rate remaining above 3.25%, which is far from the 1% level desired by Trump.

Confidence from Silicon Valley

Warsh's optimistic predictions about AI productivity largely stem from his deep connections with Silicon Valley. As a researcher at the Hoover Institution at Stanford University, he has closely observed the evolution of the AI industry Wash predicts that the AI boom will rapidly disrupt the job market, with top companies achieving "unimaginable" transformations within a year.

His mentor, billionaire Stanley Druckenmiller, told the Financial Times that Wash has developed a profound judgment on the impact of technology on the economy during his management of family office private equity investments (primarily involving technology companies). Druckenmiller believes that Wash has a vast network and not only understands macro-level issues but also has a deeper understanding of the speed and disruptive potential of AI development, giving him a more profound insight than ordinary macroeconomists.

Current Federal Reserve officials also hold an open attitude towards the potential of AI. Federal Reserve Chairman Jay Powell and Governor Lisa Cook recently acknowledged that AI will ultimately enhance productivity and drive up wages, although this impact may come with initial disruptions.

Inflation Concerns: Demand Outpacing Supply

Despite the optimistic vision, there is a divide in the economics community regarding whether AI can deliver on its productivity promises in the short term. Former Federal Reserve official and current Chief Economist at BNY Mellon Vincent Reinhart pointed out that while AI undoubtedly raises expectations for future output, it "has not currently contributed much to productivity increases."

Many economists are concerned that the current AI boom is primarily boosting demand rather than expanding the supply capacity of the U.S. economy. Anil Kashyap, a professor at the University of Chicago Booth School of Business, warned that if there is a surge in spending (such as soaring capital investments and consumption driven by stock market gains) while productivity benefits lag, this could put pressure on inflation.

James Knightley of ING also stated that there is currently no evidence to suggest a productivity revolution will occur in the next two years unless the labor market experiences real pain. Nobel laureate Daron Acemoglu bluntly stated that "neither economic theory nor data" can match the bullish sentiment of technological optimists.

The Challenge of Data: A Real Lesson from Greenspan

Wash's biggest challenge in replicating Greenspan's success lies in how to persuade current Federal Reserve decision-makers. According to those who experienced the FOMC meeting in September 1996, Greenspan was able to convince colleagues like Janet Yellen not just through intuition but through solid data.

Former Federal Reserve Vice Chairman Don Kohn noted that Greenspan was a person who paid great attention to data, and behind his intuition was the discovery of deep information that others had not uncovered—at that time, rising wages, high profits, and low inflation were a puzzle in themselves. Yellen also recalled to the Financial Times that Greenspan conducted extensive research, using a wealth of economic data to support his views This means that if Waller wants to promote his "AI productivity boom" theory at future interest rate decision meetings, he cannot rely solely on anecdotes from Silicon Valley, but must, like Greenspan in the past, present the committee with concrete economic data to prove that inflation will not return while interest rates are being cut