National Economic Council Director Kevin Hassett, the front-runner to be nominated chairman of the Federal Reserve, argued that an artificial intelligence boom could afford the central bank the opportunity to rapidly lower its interest rate target.
President Donald Trump has pushed hard for lower rates on the grounds that doing so would allow people to more easily finance major purchases, such as cars and homes. However, Hassett made the more nuanced argument that a positive supply shock from the AI boom could be a reason to lower interest rates.
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During an appearance at the Wall Street Journal CEO Council Summit, Hassett compared the current situation with AI to the productivity boom experienced by the rise of personal computers during the 1990s. Hassett was a senior economist at the Fed under longtime Fed Chairman Alan Greenspan at the time, and noted that Greenspan considered the integration of the computer and the internet as a positive supply shock.
“And so a lot of the board members were saying we need to tighten, tighten, tighten because the unemployment rate is so low, but he was like, well wait a minute, if you get a technological change and you get a big supply shock then maybe you can let it go — but you’ve got to watch and make sure the inflation doesn’t take off,” Hassett said.
He drew a line from the increased integration of AI to interest rate policy.
“I think that right now AI is a bigger story productivity-wise than the computer — and so it’s a time that the Fed has a chance to do what Greenspan did in the 90s,” he said.
The argument linking an AI boom to lower interest rates is not universally shared by economists, who have noted the uncertainty surrounding the nascent industry and point out that inflation remains too high and unemployment is relatively low.
“I think it’s certainly a perspective, nobody has any crystal ball as to exactly what’s going to happen, how AI is going to sort of manifest itself throughout the economy,” Bankrate financial analyst Stephen Kates told the Washington Examiner.
Kates said it’s unclear to what extent AI will boost productivity. He said there has only been an “inkling” of those AI-led productivity gains so far. Still, he said, a year from now or several years from now, there is a chance that AI could lead to a significantly larger productivity boost for the economy.
“With Kevin Hassett saying that’s going to be disinflationary, or reduce the rate of inflation — it’s possible, but we just don’t know,” he added. “I think, lowering rates ahead of a possible disinflationary event risks continuing to fuel this sort of lukewarm inflation that we’re seeing now.”
Inflation rose one-tenth of a percentage point to 2.8% for the year ending in September, according to the most recent reading of the Fed’s preferred inflation gauge. Core inflation, which strips out volatile food and energy prices, fell one-tenth of a percentage point to 2.8% on an annual basis.
That is still above the Fed’s preferred 2% level, which it considers healthy inflation.
While Hassett is seen as the most likely pick for Fed chairman, Trump has said he does not intend to reveal his choice until early next year. Trump said in an interview with Politico this week that he views a willingness to quickly reduce interest rates as a litmus test for whoever he chooses.
However, there is only so much a Fed chairman can do. For one, the chairman is just one person, and a larger committee is responsible for deciding whether and how to adjust the central bank’s target rate.
Also, lowering the Fed’s target rate doesn’t necessarily mean that the high mortgage rates that have prevented many people from buying homes will quickly fall.
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To adjust monetary policy, the Fed targets very short-term rates in a specific market, namely, for lending between financial institutions overnight. Longer-term rates, such as those on 30-year fixed-rate mortgages, do not always move in tandem with the Fed’s target, and since the Fed cut rates last year and this year, they have not.
In fact, abrupt reductions in the Fed’s target rate could even generate higher long-term rates. For instance, if the Fed board becomes too dovish and cuts rates too much while inflation remains too high, it might cause inflation expectations to surge and have the opposite intended effect on longer-term rates.
