AI is sneaking up on the Fed. Will Warsh be ready?

Subscribe to enjoy similar stories. About the author: Mike Harris is the founder of Cribstone Strategic Macro and director of the Syracuse University Whitman School of Management London Program. Markets are hugely enthusiastic about what coming AI-driven growth and President Donald Trump’s pick for the next Federal Reserve chair, Kevin Warsh, might mean for the economy. But their read on the situation is too simplistic.

A growth supercycle from the mass manufacture and deployment of AI robotics is coming, but it is years away. In the meantime, there will likely be significant white-collar job losses that could spark a recession. Warsh’s conviction that rates need to fall means he is much better positioned to avoid a recession than the backward-looking, data-dependent Jerome Powell.

But if an AI-related recession does indeed materialize, Warsh will probably be a much worse steward of the economy. That is because he is so wedded to shrinking the Fed’s balance sheet. (He has argued that lower interest rates and AI productivity gains will drive disinflation, giving him room to reduce the balance sheet.) If Warsh’s disinflationary call on AI is right, fantastic.

But, if post-rate cuts, there is a recession from AI-related layoffs, the Fed would have limited power to respond should Warsh remain ideologically opposed to reinflating the balance sheet. Quantitative easing has been a key tool for producing stimulus in the economy during modern recessions. Warsh seems unwilling to use that tool.

Another challenge for Warsh will be the nature of an AI-driven recession. Central banks aren’t used to dealing with a labor market that softens because of new technology rather than demand weakness. When employers cut jobs because of weak