economy
May 7, 2026
Why an AI productivity boom could justify higher rates
The Chicago Fed president argues that the proper Fed response to a productivity surge depends on whether it's a surprise or widely known and expected to continue.
TL;DR
- The Federal Reserve's interest rate policy in 2026 may depend on whether the current AI-driven productivity surge is seen as a surprise or widely anticipated.
- If the surge is widely known and expected to continue, similar to 1999, the Fed might need to raise interest rates to combat potential inflation.
- If the surge is not yet fully recognized, similar to 1995, there could be more flexibility for lower interest rates due to its disinflationary effects.
- Expectations of future productivity can lead to increased demand today, creating inflationary pressures that the Fed may need to counteract with higher rates.
- The argument contrasts with Kevin Warsh's view that AI's supply-side benefits justify keeping rates low, akin to Alan Greenspan's approach in the 1990s.