Kevin Warsh, the designated Federal Reserve chair, is reported to plan large interest rate cuts from May, with AI as the main justification. The approach links AI to lower inflation and faster growth, in a way compared with information technology around the turn of the millennium.
At present, the article cites US inflation at around 3% and unemployment as relatively low, which makes rate cuts harder to justify on current conditions. Warsh wrote in a November Wall Street Journal piece that AI would act as a deflationary force by raising productivity and strengthening US competitiveness.
Ai As A Deflationary Policy Anchor
Commerzbank economists Bernd Weidensteiner and Dr Christoph Balz say AI’s effect on productivity is still uncertain, and that the current macro environment is less disinflationary than in the 1990s. They warn that rapid easing could leave US monetary policy overly expansionary and raise inflation risks through 2027.
The article expects Warsh could deliver 100 basis points of rate cuts by spring 2027. It also states the article was produced using an AI tool and reviewed by an editor.
We see a major policy shift coming with the designated Fed chair, Kevin Warsh, expected to take over in May. He is signaling significant rate cuts, using the argument that AI will act as a deflationary force. This creates a direct conflict with the latest CPI data from January, which showed core inflation stubbornly holding at 3.1%.
In the coming weeks, traders will likely start pricing in these cuts, regardless of the inflation data. We could see increased buying in short-term interest rate futures, anticipating a more dovish Fed by the summer. This could also lead to a steeper yield curve, as long-term bond yields may rise on future inflation fears.
Positioning For A Higher Inflation Tail
Given the risk that this policy becomes too expansionary, positioning for higher inflation in 2027 is a key strategy. This involves looking at inflation swaps and other derivatives that would profit if inflation overshoots the Fed’s target. The uncertainty between the Fed’s new story and the sticky inflation numbers suggests volatility will increase, making options on interest rates attractive.
We remember the productivity boom of the late 1990s, but the setup today is very different. Back in 2025, fourth-quarter data showed nonfarm productivity growth slowing, casting doubt on an immediate AI-driven surge. Furthermore, the high government debt levels today limit the Fed’s flexibility compared to the dot-com era.
