Survey shows 60% of economists unconvinced AI will let Fed cut interest rates

A majority of economists have shot down Kevin Warsh’s bold claim that artificial intelligence will give the Fed enough room to lower interest rates without inflation picking up.

According to a snap poll by the University of Chicago’s Clark Center and the Financial Times, nearly 60% of top economists say the impact of AI on inflation and borrowing costs over the next two years will be close to zero.

This is a direct challenge to the main argument being used by Donald Trump’s choice for Fed chair.

Kevin, nominated in late January to take over from Jay Powell in May, argues AI will spark “the most productivity enhancing wave of our lifetimes.” In his view, this would allow the Fed to slash interest rates from the current 3.5%–3.75% range without overheating the economy.

But economists aren’t buying the pitch. Most of the 45 respondents in the survey expect AI to shave off less than 0.2% from both PCE inflation and the so-called neutral rate, the rate that doesn’t slow or speed up growth, over the next 24 months.

Economists challenge Warsh’s view on AI’s short-term effects

Jonathan Wright, an economist at Johns Hopkins and former Fed staffer, said, “I don’t think [the AI boom] is a disinflationary shock. I don’t think — over the near term — it’s very inflationary either.”

About one-third of the economists polled actually believe AI could push the Fed to raise the neutral rate slightly. That completely undercuts Kevin’s suggestion that technology alone can justify lower rates.

Kevin’s bet on AI comes as he tries to win over the rest of the Federal Open Market Committee (FOMC), the rate-setting body. That won’t be easy. Many inside the Fed, including Vice Chair for Monetary Policy Philip Jefferson, have warned that AI could temporarily raise inflation by increasing demand.

“Even if AI ultimately succeeds in greatly enhancing the productive capacity of the economy,” Jefferson said at a Brookings event, “a more immediate increase in demand associated with AI-related activity could raise inflation temporarily,” especially as data centers and other infrastructure projects ramp up.

That puts Kevin in a tough spot. Trump wants aggressive rate cuts before the November midterms, but the Fed itself is forecasting just one 0.25% cut this year.

That leaves the main policy rate stuck above 3.25%, far above the 1% level Trump has said the economy needs. Convincing the FOMC to back a rapid loosening based on AI optimism alone looks like a losing battle.

Warsh’s balance sheet plan adds to the tension

Warsh has also taken aim at the Fed’s balance sheet, calling it “bloated” and pushing to shrink it further. This is another spot where he could clash with current Fed officials.

The FOMC just ended its three-year “quantitative tightening” effort, which cut the central bank’s asset stockpile from nearly $9 trillion to $6.6 trillion.

Trying to force more cuts could rattle bond markets and drive up long-term borrowing costs, including mortgage rates, right when housing affordability is already a political hot button.

Despite that risk, more than three-quarters of the economists polled say they want the balance sheet below $6 trillion within two years. Karen Dynan of Harvard says shrinking it “somewhat further is not unreasonable if done on a conditional basis,” meaning only if markets stay stable and liquidity doesn’t dry up.

Still, the idea that Kevin wants to slash short-term rates while also cutting the balance sheet has people scratching their heads. It’s a strange mix of dovish on rates and hawkish on assets, and it’s not clear how that would work. “Uncertainty abounds,” said Jane Ryngaert from Notre Dame. “It’s hard to say much about anything.”

Others say the whole situation could go in either direction. Robert Barbera, another economist at Johns Hopkins, laid out two extreme possibilities:

Lastly, Kevin’s backing of bank deregulation, also a Trump priority, isn’t sitting well with most economists either. Just over 60% said loosening financial rules would have little to no benefit for short-term growth and could make another financial crisis more likely.