Written by: Dong Jing
The foremost challenge facing Walsh upon becoming Fed Chairman is not whether to raise or lower interest rates, but a more fundamental judgment: What kind of boom is the current AI prosperity? This judgment will determine the Fed's policy direction and define Walsh's place in history.
On June 19, Nick Timiraos, known as the "New Fed Whisperer," reported that the economic community holds two diametrically opposed interpretations of the AI construction boom:
First, the productivity dividend is about to materialize, supply will catch up with demand, and the Fed can stand pat and wait for inflation to subside naturally; second, the benefits of productivity gains are still in the distant future, while the demand shock has already arrived. If the Fed waits for data confirmation, it will miss the optimal intervention window and ultimately be forced to raise rates more sharply.
While the Fed held rates steady this week, nearly half the officials in the latest dot plot still project rate hikes this year, with the rest holding the opposite view. This deep internal division reflects the high degree of uncertainty surrounding this core issue.
Walsh's own inclination was faintly visible at the press conference. He repeatedly emphasized "robust, productivity-driven growth is not something we fear, but something we embrace," an echo of Greenspan's 1996 thinking.
However, the macroeconomic environment he faces—tariff pressures, widening fiscal deficits, fading globalization dividends—is far removed from the smooth sailing of Greenspan's era. Making the correct judgment between these two historical scripts will be Walsh's first true test at the Fed's helm.
Two 1990s: The Dual Legacy Left by Greenspan
Timiraos indicates that Walsh has repeatedly invoked the 1990s as a historical reference over the past year, but that decade itself contains two very different stories.
In 1996, facing rapid economic expansion, Greenspan chose to stand pat. He judged that fast growth wouldn't ignite inflation, and history proved him right. The expansion continued for years, earning him the reputation of a "maestro."
In 1999, Greenspan changed his judgment. With soaring stock markets and a persistently tight labor market, he began a series of rate hikes, which culminated in the dot-com bubble burst. It was also in this year that the Fed established its "forward guidance" mechanism of signaling rate hikes in advance—a practice that continues to this day and one that Walsh has explicitly stated he wishes to abolish.
The Trump administration publicly favors the 1996 version of the Fed. Before taking office, Walsh also publicly expressed his desire to create a central bank "confident enough to do less." Yet, current economic conditions may be handing him a different version of the script.
Walsh's Judgment Logic: Believe the Narrative, Not Wait for the Data
Before taking office, Walsh publicly stated his position on Fox Business: He fears the Fed is about to make its "sixth or seventh major mistake"—tightening monetary policy too early in what should be a hands-off productivity boom.
Timiraos reports that his core argument is: Productivity gains from AI will not be immediately reflected in official statistics; it may take several years for them to show up. If the Fed insists on waiting for data confirmation, it risks misdiagnosing a benign boom as an overheating economy and raising rates—which would precisely choke off the growth momentum that could have subdued inflation.
The essence of this logic advocates using a forward-looking narrative instead of lagging data as the basis for decision-making. Walsh continued this line of thinking at the press conference: when asked whether AI is currently boosting demand or expanding supply, he merely stated "demand is easier to measure than supply," deliberately avoiding a clear stance while adhering to the principle of "not telegraphing the next move" in communication.
Timiraos believes that even if Walsh's ultimate judgment is correct, the 1990s analogy is not complete.
When Greenspan made his famous gamble in 1996, he had multiple tailwinds: cheap goods and labor from abroad continuously suppressed inflation, and the federal fiscal deficit was narrowing. These structural factors provided additional safety margins for the Fed's "wait-and-see" approach.
Walsh faces a markedly different environment: tariff policies are raising import costs, fiscal deficits are expanding rather than contracting, and globalization dividends have faded. This means that even if the AI productivity dividend ultimately materializes as expected, the inflationary pressure Walsh endures while waiting will far exceed what Greenspan faced back then.
Counterargument: The Chicago Fed's "Front-Loading of Expectations" Model
Timiraos points out that the most systematic challenge to Walsh's judgment logic comes from Chicago Fed President Austan Goolsbee.
According to a Wall Street Journal report, Goolsbee proposed a key distinction at a Stanford University conference last month: Whether a productivity boom allows a central bank to stand pat depends on whether the boom is unexpected. A boom that everyone can foresee can have the opposite effect—people will front-load their future wealth, increasing spending significantly before the productivity gains materialize, leading to economic overheating.
"You end up having to raise rates more than you would have had to if you had acted earlier," Goolsbee said.
He believes the current AI boom is precisely this type of "visible to all." Surveys of economists, tech workers, and the general public show the market widely expects AI to 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 raise rates, not a reason to cut.
Goolsbee also cited real-world "overheating signals": AI data center construction is driving up the prices of land, electricity, and chips, while also increasing costs for electricians and equipment, squeezing resources from other sectors. Apple's announcement this week of price hikes due to rising costs was cited by him as evidence this mechanism is at work.
It is worth noting that Goolsbee's framework is not without challengers. Fed Governor Christopher Waller, at the same Stanford conference, pointed out that the "front-loading of expectations" mechanism can work only if people are able to borrow to spend ahead. In reality, however, spending for many households is tightly constrained by current income, making it difficult to monetize future wealth easily.
"If they cannot front-load that spending, the whole mechanism gets shut off," Waller said.
This rebuttal provides theoretical support for Walsh's "stand pat" stance: If borrowing constraints are widespread enough, the demand-frontloading effect will be greatly diminished, making a productivity boom more likely to expand supply in a benign manner rather than triggering inflation.
Ultimate Paradox: Abolish Forward Guidance, or Be Forced to Use It
Furthermore, Timiraos argues that Walsh faces a deeper paradox at the Fed's helm, and this paradox stems precisely from what he most wants to change.
He has explicitly stated his desire to create a Fed that "does not show its cards in advance," reducing forward guidance and keeping markets guessing. However, the Fed's current forward guidance mechanism was established precisely in 1999—when Greenspan, to avoid catching markets off guard, began signaling rate hikes in advance.
If the economic trajectory is as optimistic as the Trump administration portrays, Walsh may never need to signal rate hikes early. But if the economy follows the other script, he will face a dilemma:
Either use the forward guidance convention he wishes to abolish, informing markets of rate hike plans in advance; or remain silent, letting markets guess the magnitude and pace of hikes, and bear the risk of severe financial market volatility that ensues.
The solution to this paradox ultimately still depends on the answer to the same question: Is it 1996, or 1999?
