WASHINGTON (AP) — President Donald Trump and his picks to head the Treasury and the Federal Reserve believe they can steer the U.S. economy into a 1999-like party state.
They are putting their trust in artificial intelligence to replicate what happened in the 1990s when another technology, the Internet, emerged. At the time, the American economy was booming as business productivity increased, unemployment fell, and inflation was contained.
Trump is confident that his candidate will become Fed chairman. Kevin WarshBy abandoning the president’s reluctance to see hidden central bank rate cuts, he could unlock even greater economic benefits.
Many economists are skeptical.
Today’s world is very different from when the Spice Girls ruled the radio and Titanic dominated the box office. And the story the Trump team is telling, that visionary Fed Chairman Alan Greenspan fueled the ’90s boom by keeping interest rates low, is incomplete at best.
“The administration is presenting a highly distorted version of what actually happened in the 1990s,” TS Lombard economist Dario Perkins said in a commentary.
Nevertheless, the Trump administration believes history can repeat itself. In the president’s view, all that is missing is a Fed chair with the foresight of Mr. Greenspan.
Impact of AI on interest rates
President Trump has repeatedly attacked current Federal Reserve Chairman Jerome Powell, whose term ends in May, for his reluctance to aggressively cut interest rates even though inflation remains above the central bank’s 2% target. Treasury Secretary Scott Bessent said on social media in January that the president wanted someone with an “open-minded, Greenspan-like mindset” to replace Powell.
“If the Federal Reserve doesn’t put the brakes on us, we’ll see productivity growth like we saw in the 1990s,” Bessent said.
January 30th, President Trump said he would choose Warsh..
In his speeches and writings, Warsh has argued that AI-driven productivity improvements could justify lower interest rates.
These views align with President Trump’s desire to lower Fed rates, but they represent a break from Warsh’s own past as an inflation hawk. In the aftermath of the Great Recession from 2007 to 2009, Mr. Warsh, then the Fed president, opposed some of the central bank’s efforts to support the struggling economy by lowering interest rates even as the unemployment rate exceeded 9%. Warsh falsely warned at the time that inflation would soon accelerate.
The issue now is productivity gains and the potential for even greater productivity gains from AI.
Dear economists, Improving productivity is like magic. When companies introduce new machinery and technology, their employees become more efficient and can produce more goods per hour. This allows companies to increase revenue and increase employee salaries without raising prices. This means that a spike in productivity can boost economic growth without causing inflation.
Greenspan and the Internet
In the mid-1990s, Greenspan was grappling with a series of strange economic circumstances. Wages were rising, but inflation was not accelerating.
A significant increase in productivity could explain this, but government data showed no sign of that. Other Fed policymakers worried that rising wages and controlling inflation were incompatible and that higher prices were coming. They wanted to raise interest rates.
But Greenspan suspected that something was missing from the official productivity figures. First, they didn’t buy into the amazing stories of efficiency gains the Fed was hearing from companies investing in computers and focusing on the Internet.
So he ordered his subordinates to comb through decades of productivity numbers. The official statistics they collected told an incredible story. Services companies, from retailers to law firms, have long been accused of declining productivity despite intense competitive pressures and huge investments in technology.
Greenspan didn’t believe it. He convinced his Fed colleagues that the government’s numbers were wrong and underestimated productivity. The two countries agreed in September 1996 to suspend interest rate hikes.
The economy grew rapidly.
Belatedly, productivity gains have begun to show up in official data. Overall, America’s economic growth rate exceeded 4% every year from 1997 to 2000, a rate that would be achieved again only once in the next quarter century. The unemployment rate fell to 3.8% in April 2000, the lowest in 30 years. Inflation remained caged, staying below 2%, which later became the Fed’s official target, for 17 consecutive months from 1997 to 1999.
History may repeat itself…?
U.S. productivity certainly looked strong in the second and third quarters of 2025. Some economists attribute the improvement to early adoption of AI. They are expected to see greater profits and strong economic growth in the coming years.
Others are less sure.
Joe Brusuelas, chief economist at consulting firm RSM, said productivity gains in 2025 “are not due to artificial intelligence” but instead reflect investments in automation that companies made during and after the COVID-19 pandemic when they couldn’t find enough workers. “Those investments are starting to pay off.”
Economist Martin Bailey, a senior fellow emeritus at the Brookings Institution, believes it will take time for AI to have a significant impact on the way companies do business and the productivity of countries.
“Companies don’t change that fast,” said Bailey, chairman of President Bill Clinton’s Council of Economic Advisers. “Change is expensive. Change is risky. Administrators don’t necessarily understand new technology very well, so they have to learn how to use it. They have to train staff. All of that takes a long time.”
A productivity boom can raise an economy’s speed limit, or how fast it can grow without pushing up prices. But that may not justify lowering interest rates, Federal Reserve President Michael Barr said in a speech earlier this month.
Companies will borrow to invest in AI, putting upward pressure on interest rates. Similarly, American workers and their families are likely to save less and take on more debt in anticipation of higher wages in return for increased productivity. If that happens, upward pressure on interest rates will further increase.
In short, Barr said, “The AI boom is unlikely to be a reason to cut policy rates.”
Even Greenspan’s Fed eventually came to the same conclusion, reversed course, and began raising its base rate in mid-1999, raising it from 4.75% to 6.5% in less than a year. (The interest rate that Trump is currently dissatisfied with is about 3.6%.)
“Mr. Warsh and Mr. Bessent are talking only about Greenspan’s dovish 1995/96 edition, and ignore the hawkish 1999/2000 edition,” Perkins wrote.
Then and now
Many of Mr. Warsh’s potential future colleagues on the Fed’s rate-setting committee view his experience in the late 1990s differently than he does, saying they could see conflict within the central bank if the Senate confirms Mr. Warsh as chairman.
“The analogy to the late ’90s is a little hard for me to understand,” Chicago Fed President Austan Goolsby said earlier this week. Mr. Greenspan’s insight was that higher productivity meant the Fed could postpone raising rates, and should not lower them, Mr. Goldsby noted.
“The question was not, ‘Should we cut interest rates because productivity growth is high?'” he said.
The economic backdrop that awaits Warsh is also far less friendly than that enjoyed by Greenspan.
Mr. Greenspan avoided raising interest rates at a time when the normally splurge-filled U.S. government was running a rare budget surplus and didn’t need to borrow as desperately. Now, after a series of spending increases and tax cuts, deficits are piling up year after year, and the Congressional Budget Office The federal debt is expected to reach a historic high of 120% of America’s GDP by 2035.
And it wasn’t just productivity that controlled inflation in the 1990s. Countries were lowering tariffs and eliminating trade barriers. Immigration was rapidly increasing.
Today, the world is much different, thanks in large part to President Trump’s own policies, particularly his massive taxes on imported goods and his crackdown on immigration. “Trade barriers are rising. Globalization has given way to deglobalization,” Perkins wrote.
“Those days of calm are clearly over,” said Michael Pearce, chief U.S. economist at Oxford Economics.
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Associated Press Economic Writer Christopher Lugaber contributed to this article.
