Federal Reserve official: If AI succeeds, there will be rate hikes; if AI fails, there will be stagflation.

The Chicago Fed President questions the AI productivity narrative, challenging the rate-cut logic of the Trump administration and the incoming Fed Chair.

On Friday, Chicago Fed President Austan Goolsbee warned that the broad expectation for AI-driven productivity itself could push up interest rates. If this technological revolution disappoints, the outcome could be even worse: stagflation.

Speaking at the Hoover Institution’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 about one extra percentage point of productivity growth per year over the next decade.

This widespread expectation itself poses a risk of economic overheating. This stance challenges the “AI-driven rate cut” narrative promoted by incoming Fed Chair Waller and the Trump administration.

According to reports, Waller is expected to be confirmed by the Senate on Monday as the 17th Fed Chair. He has previously stated repeatedly that AI will usher in “the greatest wave of productivity gains in our lifetimes,” characterizing it as a “structural factor suppressing inflation,” suggesting the Fed thus has greater space to cut rates.

US Treasury Secretary Besant shares the same view, comparing the current situation to “the budding stage of a productivity boom, not unlike the 1990s.”

Expectation Itself Is a Risk

The core of Goolsbee’s argument is: the macro effects of productivity gains depend on whether they are "unexpected" or "anticipated."

He explained that when productivity improves unexpectedly, inflation falls and interest rates can follow lower. But when the market has already fully priced in the technological dividend—just as current AI enthusiasm is broadly reflected in financial markets and corporate balance sheets—households and businesses will expand spending and investment ahead of actual productivity gains.

This “borrowing from the future” leads to current economic overheating, in turn pushing up interest rates.

He cited the tech boom of the 1990s, noting that under then-Fed Chair Alan Greenspan, the Fed actually raised interest rates six consecutive times between 1999 and 2000, precisely to address the pressure from demand being unleashed in advance of anticipated productivity gains.

Goolsbee said that the analogy drawn by Waller and others to justify rate cuts using the 1990s, "is hard for me to understand."

If AI Fails, Stagflation Risk Emerges

When pressed by former St. Louis Fed President James Bullard on "what happens if AI productivity expectations fall short," Goolsbee offered a more severe assessment.

He said that if expectations for a boom persist and spending and investment are repeatedly pulled forward—but the technological dividend ultimately fails to materialize, the economy will enter a recession against the backdrop of overheating demand and persistently high inflation. He said:

You very easily get stagflation. This isn’t a bubble; it’s fundamental.

Goolsbee also listed several leading indicators he is monitoring:

Housing prices, reflecting the wealth effect’s boost to consumer spending;The boom in data center construction raising land and chip costs, with spillover effects hitting industries unrelated to AI;Changes in the number of workers leaving the labor market due to expectations of future wealth increases.

Internal Divergence: Other Voices Question the Logic

Goolsbee’s assessment is not without dissent. At the same forum, Fed Governor Waller rebutted his core argument.

Waller said that the wealth effect channel described by Goolsbee "has existed in many models for a long time," but has "not persisted in real-world data." He added that if models take account of the reality that households cannot easily collateralize future income, or spending adjusts more gradually, the effect will be greatly reduced.

Atlanta Fed visiting scholar Steven Davis raised concerns from another angle. He cited a recent Atlanta Fed analysis showing that the mean of AI investment spending among firms is 14 times the median, indicating this investment boom is highly concentrated among a few companies, not widely diffused.

University of Chicago economist Luigi Zingales offered another perspective. New York Fed surveys show that more residents expect to lose their jobs due to AI, which could instead raise the savings rate rather than spur early consumption.

This points in the opposite direction from Goolsbee’s concern. Goolsbee himself acknowledged that this dynamic could indeed point to the opposite conclusion.

Risk Reminder and DisclaimerMarkets are risky and investment requires caution. This article does not constitute personal investment advice, nor does it consider the specific investment objectives, financial status, or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are appropriate to their situation. Investing based on this is at your own risk.