Senior Fed official: If AI succeeds, rates will increase; if AI fails, there will be stagflation.

Chicago Fed President questions the narrative of AI productivity, challenging the interest rate reduction logic of the Trump administration and the nominee for Fed chair. On Friday, Chicago Fed President Austan Goolsbee warned that the widespread expectation of artificial intelligence productivity itself may raise interest rates. If this technological revolution disappoints, the result could be even worse: stagflation. Speaking at the Hoover Research Institute's annual monetary policy conference at Stanford University, Goolsbee said, "The greater the hype, the greater the risk." He cited Chicago Fed survey data showing that economists, tech professionals, and the general public all expect an additional 1% productivity growth per year over the next decade. This widespread expectation poses a risk of overheating the economy. This statement challenges the "AI-driven interest rate cuts" narrative promoted by William Washe, the incoming Fed chair, and the Trump administration. Washe is expected to be approved by the Senate on Monday as the 17th Chairman of the Federal Reserve. He has previously stated many times that AI will usher in "the most productivity-enhancing wave of our lifetimes," and has characterized it as a "structural suppressor of inflation," implying that the Fed will have more room to cut interest rates. US Treasury Secretary Benson also holds the same position, comparing the current situation to the "incipient phase of a productivity boom, similar to the 1990s." Expectations themselves are a risk Goolsbee's main argument is that the macro effects of productivity improvement depend on whether it is an "unexpected arrival" or "anticipated." He explained that when productivity improves beyond expectations, inflation falls, and interest rates can subsequently decrease. But when the market has already priced in the technological dividend, as is currently reflected in the enthusiasm for AI in financial markets and corporate balance sheets, individuals and businesses will increase spending and investment before real productivity takes off. This "overdrafting the future" behavior will cause the economy to overheat, leading to higher interest rates. He pointed to the tech boom of the 1990s as an example, when the Fed, led by Chairman Greenspan, actually raised rates six times between 1999 and 2000 to address the pre-release of demand brought about by anticipated productivity increases. Goolsbee said that the comparisons to the 1990s made by Washe and others as a reason for interest rate cuts are "somewhat difficult for me to understand." Stagnation risks emerge once AI fails When former St. Louis Fed President James Bullard asked, "What if AI productivity expectations fail," Goolsbee gave a more severe assessment. He said that if the market continues to expect prosperity, constantly overdrawing consumption and investment, and the technology dividends ultimately fail to materialize, the economy will enter a recession amidst overheated demand and persistent high inflation. He said: You easily end up with stagflation, this is not a bubble, this is a fundamental issue. Goolsbee also listed several leading indicators he is monitoring: The wealth effect reflected in housing prices driving consumer spending; The boom in data center construction leading to increased land and chip costs, which has spread to industries unrelated to AI; And changes in the number of workers exiting the labor market due to expected future wealth increases. Internal discord: Other voices question this logic Goolsbee's judgment is not without dissent. At the same forum, Federal Reserve Board Governor Waller refuted his key arguments. Waller said that the wealth effect channel described by Goolsbee "has long existed in many models," but has not been sustained in actual data. He added that if realistic factors such as households' difficulty in easily mortgaging future income or gradual expenditure adjustments are included in the model, this effect will significantly weaken. Atlanta Fed visiting scholar Steven Davis raised doubts from another dimension. He cited recent analysis by the Atlanta Fed, indicating that the average AI investment spending of each enterprise is 14 times that of the median, suggesting that this investment boom is highly concentrated in a few companies rather than widely spread. University of Chicago economist Luigi Zingales also presented another perspective. A New York Fed survey shows that an increasing number of residents expect to lose their jobs due to AI, which may actually increase the savings rate rather than stimulate consumption early release. This is opposite to Goolsbee's concerns. Goolsbee himself acknowledges that this dynamic could indeed point to the opposite conclusion. This article is from Wall Street See and was reprinted. GMTEight Editor: Chen Yufeng.