A majority of economists have challenged the central argument of Kevin Warsh, Donald Trump's nominee for Federal Reserve Chair, that artificial intelligence will provide enough room for the Fed to aggressively lower interest rates. According to a snap poll by the University of Chicago's Clark Center and the Financial Times, nearly 60% of top economists believe the impact of AI on inflation and borrowing costs over the next two years will be close to zero.
Warsh, nominated in late January to succeed Jerome Powell in May, argues that AI will spark "the most productivity enhancing wave of our lifetimes," allowing the Fed to slash rates from the current 3.5%–3.75% range without overheating the economy. However, most of the 45 survey respondents expect AI to shave off less than 0.2% from both PCE inflation and the neutral rate over the next 24 months. About one-third of economists polled actually believe AI could push the Fed to raise the neutral rate slightly.
This skepticism creates a difficult path for Warsh as he tries to win over the Federal Open Market Committee (FOMC). Many inside the Fed, including Vice Chair for Monetary Policy Philip Jefferson, have warned that AI could temporarily raise inflation by increasing demand for data centers and infrastructure. "Even if AI ultimately succeeds in greatly enhancing the productive capacity of the economy, a more immediate increase in demand associated with AI-related activity could raise inflation temporarily," Jefferson stated.
Despite Warsh's hawkish reputation, market expectations for a rate cut have shifted. CME FedWatch Tool data shows the probability of a 25-basis-point cut in March has risen to 23%, up from 18.4% just days earlier, following his nomination. Traders now price in one small cut, though no signs of an aggressive easing cycle. Polymarket data indicates 27% of traders expect two cuts this year, while 26% see a possibility of three.
Warsh's additional stance on shrinking the Fed's "bloated" balance sheet further adds tension. The FOMC recently ended a three-year quantitative tightening effort that reduced assets from nearly $9 trillion to $6.6 trillion. More than three-quarters of polled economists want the balance sheet below $6 trillion within two years, but forced cuts could rattle bond markets and drive up long-term borrowing costs.
The nomination has led to adjustments in crypto markets, which typically thrive in low-rate, high-liquidity environments. Some analysts, however, suggest a shift. Jeff Park, CIO at ProCap Financial, argues Bitcoin's next major rally could occur even with high rates, describing it as the "mythical, elusive perfect holy grail of what Bitcoin is meant to be." This scenario, termed "positive row Bitcoin," would see the asset rise despite restrictive monetary policy, challenging traditional market valuations.
