Kevin Warsh Impact on the Fed’s Stance and Monetary Policy

Is AI Giving Us the Economic Superpower of the 1990s Again?

Here’s a big question we should all be asking: is it really possible to achieve strong economic growth without accidentally unleashing inflation? You know, the U.S. economy looks pretty robust right now, but if things are so good, why are central banks even considering lowering interest rates? Well, the core argument coming out of certain political circles—and this is the exciting part—is that we might be entering a new, powerful era where output surges without prices skyrocketing, thanks to a revolution on the supply side . If this scenario plays out, where growth is solid and inflation remains stable, you can bet that asset markets—stocks, real estate, the whole nine yards—are going to be incredibly happy . This feels like a familiar script, and the secret ingredient this time, just like in the 90s, seems deeply intertwined with technology, specifically Artificial Intelligence .

This whole idea forces us to look back to the 1990s, a period famously known for massive productivity gains that changed the game entirely . Productivity, simply put, is the ability to produce more output using the same amount of input cost; imagine making 100 items for the same price that previously only got you 10 items . When technology improves and factory floors become automated, costs per unit plummet, and even if producers pass on some of those savings to consumers by lowering prices, their profit margins (or value creation) still balloon . What's interesting is that back then, as the economy heated up, Federal Reserve officials usually argued for preemptive rate hikes to cool things off and stop inflation, but then-Fed Chair Alan Greenspan famously waved them off . He believed the productivity boom was creating a "New Economy" where growth could coexist with low inflation—a truly counterintuitive insight at the time.

Now, fast forward to today, and we see echoes of this argument everywhere, especially when we talk about AI and massive hyperscaler investments in new infrastructure . Officials like Treasury Secretary Bessent and economists like Kevin Hassett have openly suggested that the Fed’s traditional, data-driven approach might be flawed because it ignores this massive potential for a positive supply shock driven by AI . If AI investment leads to a productivity leap similar to the 90s, then prices could naturally stabilize, meaning the Fed could afford to lower rates without fear of overheating the economy . From my experience watching market cycles, these periods of technological disruption are rare, but when they hit, they fundamentally change the inflation-growth dynamic, supporting the possibility of a stable, long-term bull market in assets . This "Again 1990" point of view suggests that the economy is not hot because of excessive demand, but stable because of fundamental improvements in supply—a difference that changes everything about monetary policy.

Why is the Federal Reserve Experiencing a “Civil War” Right Now?

It really seems like the Fed is currently in the midst of a massive internal conflict—a kind of central bank civil war, if you will . There are huge disagreements among policymakers right now, with factions advocating for rate hikes, cuts, or simply holding steady, which suggests a severe lack of consensus and perhaps even a degree of political vulnerability for current Chair Jerome Powell . This disunity is fascinating because it's playing out against a backdrop of complex economic signals, where strong growth and softening inflation should ideally make decisions easier, not harder . The market is definitely watching all this turbulence with a degree of skepticism and perhaps even a bit of impatience .

This internal tension becomes even clearer when you look at the recent policy moves, particularly regarding the balance sheet. The Fed has been easing rates while simultaneously discussing increasing purchases of Treasury securities, which sounds awfully like Quantitative Easing (QE), a policy generally known for boosting asset prices . The Fed insists this isn't QE because they are focused on buying short-term Treasury bills, not long-term bonds, claiming their goal is not to artificially inflate asset values . Here’s the surprise: traditional QE is designed to buy long-term bonds, which lowers long-term interest rates (like mortgage rates), driving up the price of housing and riskier assets as investors seek higher yields outside of low-returning, safe Treasuries.

So, if it’s not asset boosting, what’s the real reason for buying these securities? It comes down to managing bank reserves—specifically, the amount of cash commercial banks hold at the central bank . Too few reserves can cause severe panic and instability in short-term funding markets, a scenario the Fed painfully experienced back in September 2019, leading to an unexpected market spike, or "hiccup" . That memory is clearly terrifying to them, like a deep-sea diver pushing past the known limits of human endurance . Therefore, the recent short-term bond purchases are simply an effort to "recalibrate" reserves to a safe, acceptable level—like adjusting the sights on a rifle (a "zeroing" exercise), not firing the weapon for an attack . However, and this is the crucial counterintuitive point, regardless of the Fed’s benign intentions—saying, "This isn't to make you rich, it's just to help you through a tough spot"—the recipient (the market) still gets the money, and liquidity is liquidity . This disconnect between the central bank's technical justification and the market's practical interpretation fuels the ongoing internal policy debate and reinforces the idea of deep policy divisions.

Is the Trump Administration Using the Fed as a Co-Pilot for Industrial Policy?

The recent discussions around potential Federal Reserve appointments, specifically figures like Kevin Hassett, reveal a fascinating alignment between political objectives and monetary policy preferences . Hassett, despite initial perceptions that he was against monetary easing and QE, has a history of political flexibility—supporting fiscal expansion under Republican administrations (like George W. Bush) and opposing easy money under Democrats . I've found that this pattern suggests his core loyalty isn't to a rigid academic dogma, but to the current governing party's agenda . For Trump’s economic vision—which prioritizes strong domestic industrial growth, tax cuts, and deregulation—the Fed’s role shifts from an independent inflation fighter to a crucial "co-pilot".

This co-pilot role means the Fed’s primary job becomes ensuring the smooth, low-cost flow of capital necessary for government-backed investment, especially toward sectors like AI and Big Tech . The argument, supported by people like Hassett, is that while reckless QE (like the kind seen under Bernanke) is bad because it creates "adverse selection" in the financial sector, a monetary policy that actively suppresses the cost of doing business (lowering financing costs and controlling inflation) is essential . In fact, one of the most surprising insights here is that policies like QE, though intended to save the economy, may have inadvertently harmed it; some statistics show the share of U.S. manufacturing in total GDP began to consistently fall after major QE interventions post-2008, suggesting money flowed into speculative finance rather than productive industry.

Ultimately, the administration is pushing for policies—tax reform, deregulation, and infrastructure investment—to boost productivity and ensure high growth, and the Fed is expected to simply provide the stable environment for these grand plans . This means actively managing inflation and ensuring market stability so the massive issuance of short-term and long-term debt doesn't cause funding bottlenecks . If the Fed adheres to this auxiliary role, we can expect them to lower rates when appropriate and ensure short-term funding markets remain liquid—even if they stop short of full-blown, traditional QE by avoiding major purchases of long-term bonds, which could keep longer-term rates volatile . This confirms that the overall direction of policy remains firmly focused on fiscal expansion, with monetary policy acting as a supportive element rather than a dominant force, a perspective that defines the financial "clash" we are seeing today.