Staff Reports
Kevin Warsh is in the hot seat. Confirmed by the Senate 54–45 as Federal Reserve Chair, he arrives promising something different from the usual central-bank sermon: don’t treat monetary policy as only a demand dial. Instead, Warsh argues that AI-driven productivity gains and a new academic paper give the Fed a reason to consider cutting rates to support supply-side growth. That’s the news buzz — and it deserves more than the usual hand-wringing from inflation hawks who think the only answer to higher prices is a higher fed funds rate.
Warsh’s supply-side pitch — plain and simple
Warsh has said AI could be “the most productivity‑enhancing wave of our lifetimes — past, present and future.” He’s not making this up on the fly. He’s pointing to serious economic work — notably the Baqaee‑Farhi‑Sangani paper — that shows easier money can sometimes raise measured productivity by reallocating resources toward more efficient, high‑markup firms. In plain English: if lower rates free up capital and labor to flow into firms that actually produce more with the same inputs, the economy’s capacity grows and inflation pressure can ease without waiting for a demand collapse.
Why this matters for rates and the AI boom
We have two real problems pressing on policy right now: an energy shock that pushes headline inflation up, and an emerging need for massive investment in chips, data centers, and advanced manufacturing if the U.S. is going to lead the AI surge. The Fed can’t drill oil or run factories, but it can set the cost of capital. High rates right now risk strangling the very investment that would relieve bottlenecks and raise supply. A carefully explained 25‑basis‑point cut — framed as a supply‑side move rather than a capitulation to weak demand — could be the difference between America building capacity and America watching competitors do the building.
Caveats, critics, and the institutional hurdle
None of this is magic. Economists rightly point out that the size and timing of AI’s productivity gains are uncertain. The Baqaee‑Farhi‑Sangani channel is real, but it depends on how firms respond and how quickly investment actually follows lower rates. Markets have already pared back expectations for early cuts amid renewed inflation, and Warsh will have to persuade a skeptical Federal Open Market Committee, not just the op‑ed pages. And yes, the press will wag its finger and scream “obedience to the White House.” He should lean into the theory and data instead of getting distracted by the predictable noise.
Bottom line: bold, but sensible if sold right
Warsh’s supply‑side case is exactly the kind of fresh thinking the Fed should be willing to consider. Conservatives who care about growth ought to welcome a chair who wants to balance inflation fighting with enabling investment. But success will depend on discipline: clear communication, hard empirical evidence of productivity gains, and a step‑by‑step plan that shows cuts are supporting supply rather than simply stoking demand. If Warsh can pull that off, he won’t merely be trying something new — he’ll be giving America a chance to win the global race on AI while keeping an eye on price stability. That’s the job the country expects him to do.
