60% of Economists Doubt AI Will Enable the Fed to Cut Interest Rates in 2024

• Why Are Economists Skeptical About AI’s Impact on Interest Rates?
• Could AI Actually Push the Fed to Raise Rates Instead?
• What’s the Political Stakes for Trump and the Fed?
• Why Is Warsh’s Balance Sheet Plan Adding Fuel to the Fire?
• Is Warsh’s Dual Strategy of Rate Cuts and Balance Sheet Cuts Feasible?
• How Does Deregulation Fit Into This Picture?
• What’s the Bottom Line for Investors?
• FAQs on AI, the Fed, and Interest Rates

A majority of economists are skeptical that artificial intelligence (AI) will provide the Federal Reserve with enough leeway to lower interest rates without fueling inflation. A rapid survey by the Clark Center at the University of Chicago and the Financial Times reveals that nearly 60% of top economists believe AI’s impact on inflation and borrowing costs over the next two years will be negligible. This directly challenges the argument made by Kevin Warsh, Donald Trump’s pick to lead the Fed, who claims AI will trigger an unprecedented productivity boom. Meanwhile, tensions rise as Warsh pushes for further balance sheet reductions, adding another LAYER of complexity to the Fed’s monetary policy debate.

Why Are Economists Skeptical About AI’s Impact on Interest Rates?

Kevin Warsh, nominated in late January to replace Jay Powell in May, has argued that AI will unleash "the greatest productivity wave of our lifetimes," allowing the Fed to cut rates from the current 3.5%-3.75% range without overheating the economy. However, most of the 45 economists surveyed disagree. They expect AI to reduce inflation and the so-called neutral rate—the rate that neither slows nor accelerates growth—by less than 0.2% over the next 24 months. Jonathan Wright, an economist at Johns Hopkins and former Fed staffer, summed it up: "I don’t think [the AI boom] is disinflationary. Nor do I think it’s highly inflationary in the short term."

Could AI Actually Push the Fed to Raise Rates Instead?

About a third of the economists polled believe AI might slightly increase the neutral rate, contradicting Warsh’s suggestion that the technology alone justifies lower rates. Philip Jefferson, the Fed’s Vice Chair for Monetary Policy, has warned that AI could temporarily boost inflation by driving up demand. "Even if AI ultimately enhances productive capacity," Jefferson said at a Brookings event, "an immediate surge in AI-related demand could push inflation higher," particularly as data centers and infrastructure projects ramp up.

What’s the Political Stakes for Trump and the Fed?

Trump has called for aggressive rate cuts ahead of the midterm elections in November, but the Fed itself projects just one 0.25% cut this year. That would leave the benchmark rate above 3.25%, far from the 1% Trump claims the economy needs. Convincing the Federal Open Market Committee (FOMC) to slash rates based solely on AI Optimism seems like a long shot. As one analyst quipped, "You can’t fight the Fed—especially when the Fed isn’t buying your argument."

Why Is Warsh’s Balance Sheet Plan Adding Fuel to the Fire?

Warsh has also criticized the Fed’s "bloated" balance sheet, urging further reductions. The FOMC recently ended its three-year quantitative tightening program, which trimmed the central bank’s asset holdings from nearly $9 trillion to $6.6 trillion. Pushing for deeper cuts could rattle bond markets and raise long-term borrowing costs, including mortgage rates—a politically sensitive issue amid already strained housing affordability. Yet, over 75% of surveyed economists want the balance sheet below $6 trillion within two years. Karen Dynan of Harvard says trimming it "a bit further isn’t unreasonable if done conditionally," provided markets remain stable.

Is Warsh’s Dual Strategy of Rate Cuts and Balance Sheet Cuts Feasible?

Warsh’s plan to cut short-term rates while shrinking the balance sheet has left many scratching their heads. It’s an odd mix of caution on rates and aggression on assets, and it’s unclear how it WOULD work. "There’s a lot of uncertainty," says Jane Ryngaert of Notre Dame. Robert Barbera of Johns Hopkins outlined two extreme scenarios: either AI sparks an expansion that comfortably shrinks the balance sheet, or it triggers a financial crash, forcing a return to zero rates and massive asset purchases.

How Does Deregulation Fit Into This Picture?

Warsh’s support for banking deregulation—a TRUMP priority—is also facing pushback. Over 60% of economists say loosening financial rules would do little for short-term growth and could heighten the risk of another crisis. As one Fed insider put it, "After 2008, you’d think we’d learned our lesson."

What’s the Bottom Line for Investors?

This article does not constitute investment advice. Markets hate uncertainty, and the Fed’s AI debate is adding plenty of it. For now, traders are pricing in a slow, cautious Fed—whether Warsh likes it or not. As always, keep an eye on data from TradingView for real-time insights.

FAQs on AI, the Fed, and Interest Rates

Will AI lower interest rates in 2024?

Most economists doubt it. Nearly 60% expect AI’s impact on inflation and borrowing costs to be minimal over the next two years.

Why does Kevin Warsh think AI justifies rate cuts?

Warsh believes AI will drive a historic productivity surge, giving the Fed room to cut rates without overheating the economy.

Could AI actually increase inflation temporarily?

Yes. Fed Vice Chair Philip Jefferson warns that AI-related demand spikes (e.g., data center construction) could push prices up in the short term.

What’s the risk of shrinking the Fed’s balance sheet further?

Aggressive cuts could destabilize bond markets, raising mortgage rates and other long-term borrowing costs.