President Donald Trump’s pick to lead the Federal Reserve, Kevin Warsh, believes advances in artificial intelligence (AI) could soon allow the central bank to cut interest rates significantly. However, some current Fed officials disagree, arguing that AI’s effects on the economy may not justify lower borrowing costs right away—and could even point toward higher rates in the long run.
Warsh, a former Fed governor nominated last month to replace Jerome Powell when his term ends in May 2026, has described AI as ushering in “the most productivity-enhancing wave of our lifetimes.” In interviews and comments from late 2025, he argued that widespread business adoption of AI would boost productivity dramatically, much like the internet did in the 1990s under former Fed Chair Alan Greenspan. Back then, strong productivity growth helped keep inflation in check while supporting economic expansion, allowing the Fed to keep rates relatively low.
Warsh has called AI “structurally disinflationary,” meaning it could reduce price pressures over time by making goods and services cheaper to produce. This, he suggested, would give the Fed room to lower interest rates without risking runaway inflation. He urged policymakers to take a “leap of faith” similar to Greenspan’s approach and lean toward cheaper borrowing to support growth.
But not everyone at the Fed shares this optimistic view for near-term rate cuts. On February 17, 2026, Fed Governor Michael Barr delivered remarks in New York casting doubt on the idea. “I expect that the AI boom is unlikely to be a reason for lowering policy rates” in the short term, Barr said. While he agreed that AI will have a “transformative effect” on the economy overall—boosting productivity, reshaping jobs, and influencing wages—he emphasized that these changes will happen gradually.
Barr explained that AI might displace some jobs while creating new ones as it integrates into existing roles. He noted that widespread unemployment is unlikely if adoption occurs slowly enough, though short-term disruptions in the labor market could still happen. Those issues, he added, are better handled by society and Congress rather than the Fed alone.
More importantly for interest rates, Barr challenged the notion that higher productivity from AI would automatically be disinflationary. In fact, he suggested the opposite could occur: stronger productivity might raise the so-called neutral rate of interest—the level where rates neither speed up nor slow down the economy. Reasons include increased business investment demand and lower savings rates as people expect higher future earnings. A higher neutral rate would mean the economy could handle elevated interest rates without overheating, reducing the need for big cuts.
Barr isn’t alone in this caution. Cleveland Fed President Beth Hammack, who votes on monetary policy this year, has said the neutral rate “could be more upward biased” if AI delivers meaningful productivity gains. Other Fed officials, including Chair Jerome Powell, have acknowledged AI’s wide-ranging potential effects but stressed that the timing and full impact remain uncertain.
Experts outside the Fed are also divided. Michael Hans, chief investment officer at Citizens Private Wealth, noted that technology has historically been disinflationary, but it’s still too early to judge when AI’s full productivity benefits will appear.
The debate matters because the Fed’s rate-setting committee has 12 voting members, each with one equal vote—including the chair. If confirmed, Warsh would need to build consensus among his colleagues to push for the lower rates he favors and that align with the Trump administration’s preferences. With disagreements already surfacing, convincing the group to view AI as a green light for cuts could prove challenging.
As AI continues to reshape industries and spark global discussion among central bankers, the Federal Reserve’s approach to interest rates may hinge on how quickly—and how powerfully—the technology translates into real economic gains. For now, the path forward remains far from clear.
