By: Dong Jing

The first major challenge facing Wash after taking office as Fed Chair is not whether to raise or lower interest rates, but a more fundamental judgment: What kind of boom is the current AI boom? This judgment will determine the Fed's policy direction and define Wash's historical legacy.

On June 19, Nick Timiraos, a journalist known as the "New Fed Wire," reported that two diametrically opposed interpretations exist within economic circles regarding the AI investment boom:

First, a productivity dividend is about to materialize, supply will catch up with demand, and the Fed can stand pat, waiting for inflation to naturally subside. Second, the benefits of productivity gains are still distant, while a demand shock has already arrived. If the Fed waits for data confirmation, it will miss the optimal intervention window and ultimately be forced to hike rates more aggressively.

The Fed held rates steady this week, but in the latest dot plot, nearly half of officials expect further hikes this year, while the rest hold the opposite view—the depth of internal division reflects the high uncertainty surrounding this core issue.

Wash's own leanings were faintly visible at the press conference. He repeatedly emphasized that "strong, productivity-driven growth is not something we fear, but something we embrace," echoing the Greenspan-era thinking of 1996.

However, the macro environment he faces—tariff pressures, expanding fiscal deficits, fading globalization dividends—is far removed from the tailwinds Greenspan enjoyed. Making the right call between these two historical scripts will be Wash's first true test at the helm of the Fed.

Two 1990s: The Dual Legacy Greenspan Left Behind

Timiraos noted that Wash has repeatedly cited the 1990s as a historical reference over the past year, but this decade itself contains two distinctly different stories.

In 1996, facing rapid economic expansion, Greenspan chose to stand pat. He judged that rapid growth would not ignite inflation, and history proved him right. The expansion lasted for years, earning him the reputation of "Maestro."

In 1999, Greenspan changed his judgment. With the stock market soaring and the labor market continuing to tighten, he began hiking rates consecutively, ultimately ending with the bursting of the dot-com bubble. It was in this very year that the Fed established the forward guidance mechanism of "signaling rate hikes in advance"—a practice that continues to this day and one Wash has explicitly stated he wishes to abolish.

The Trump administration publicly admires the 1996 version of the Fed, and before taking office, Wash also publicly stated his desire to build a central bank "confident enough to do less." However, the current economic situation may be handing him a different script.

Wash's Judgment Logic: Trusting Narrative, Not Waiting for Data

Before taking office, Wash publicly stated his position on Fox Business: He worries the Fed is about to make its "sixth or seventh major mistake"—tightening monetary policy prematurely in a productivity boom that should be left alone.

Timiraos stated his core argument is: The productivity gains from AI will not immediately show up in official statistics and may take years to materialize. If the Fed insists on waiting for data confirmation, it will misdiagnose a benign boom as an overheating economy and hike rates—which would precisely kill the growth momentum that could have suppressed inflation.

The essence of this logic is advocating for forward-looking narratives to replace lagging data as the basis for decision-making. Wash continued this line of thinking at the press conference: when asked whether AI is currently boosting demand or expanding supply, he merely stated that "demand is easier to measure than supply," deliberately avoiding a clear stance while adhering to the communication principle of "not telegraphing the next move in advance".

Timiraos believes that even if Wash's judgment ultimately proves correct, the 1990s analogy is incomplete.

When Greenspan made that famous bet in 1996, he had multiple tailwinds behind him: cheap goods and labor from overseas continuously suppressed inflation, and the federal fiscal deficit was narrowing. These structural factors provided an extra safety margin for the Fed's "wait-and-see" approach.

Wash faces a vastly different environment: tariff policies are pushing up import costs, the fiscal deficit is expanding rather than contracting, and the globalization dividend has faded. This means that even if the AI productivity dividend eventually materializes on schedule, the inflationary pressures Wash endures while waiting will be far greater than what Greenspan faced back then.

Counterargument: The Chicago Fed's "Anticipatory Overconsumption" Model

Timiraos pointed out that the most systematic challenge to Wash's judgment logic comes from Chicago Fed President Austan Goolsbee.

According to The Wall Street Journal, Goolsbee presented a key distinction at a Stanford University conference last month: Whether a productivity boom allows the central bank to stand pat depends on whether the boom is unexpected. A boom that everyone can foresee will have the opposite effect—people will borrow against future wealth in advance and significantly increase spending before the productivity dividend materializes, causing the economy to overheat.

"Ultimately, you have to hike rates much more aggressively than if you had acted earlier," Goolsbee said.

He believes the current AI boom falls precisely into this "visible to all" category. Surveys of economists, tech practitioners, and the general public all show a widespread market expectation that AI will deliver about one percentage point of annual productivity gains, with most benefits still in the future. According to his model, this expectation itself constitutes a reason to hike rates, not to cut them.

Goolsbee also cited real-world "overheating signals": AI data center construction is driving up land, electricity, and chip prices, while also raising costs for electricians and equipment, squeezing resources from other industries. Apple's announcement this week of price increases due to rising costs was cited by him as evidence that this mechanism is already at work.

Notably, Goolsbee's framework is not without challengers. Fed Governor Christopher Waller pointed out at the same Stanford conference that the "anticipatory overconsumption" mechanism can only function if people can borrow to spend in advance. In reality, many households' spending is strictly constrained by current income, making it difficult for them to easily monetize future wealth.

"If they can't pull forward that spending, the whole mechanism breaks down," Waller said.

This rebuttal provides theoretical support for Wash's "stand pat" stance: if borrowing constraints are sufficiently widespread, the demand front-loading effect will be greatly diminished, making it more likely that the productivity boom will drive supply expansion moderately rather than trigger inflation.

The Ultimate Paradox: Abolish Forward Guidance, or Be Forced to Use It

Furthermore, Timiraos also believes that Wash faces a deep paradox in leading the Fed, and this paradox stems precisely from the very thing he most wants to change.

He has clearly stated his desire to build a Fed that "doesn't tip its hand in advance," reducing forward guidance and keeping the market guessing. However, the Fed's current forward guidance mechanism was established precisely in 1999—when Greenspan, to avoid catching the market off guard, began signaling rate hikes in advance.

If the economy unfolds as optimistically as the Trump administration describes, Wash may never need to signal rate hikes in advance. But if the economy follows the other script, he will face a dilemma:

Either adopt the forward guidance convention he wishes to abolish and inform the market of rate hike plans in advance; or remain silent, letting the market guess the magnitude and pace of hikes on its own, bearing the risk of severe financial market volatility that would ensue.

The resolution to this paradox ultimately depends on the answer to the same question: Is it 1996 now, or 1999?