"New America News Agency": 1996 or 1999? Wash's first test is "how to look at AI"

After taking office as Chairman of the Federal Reserve, Powell faces a crucial challenge, not whether interest rates should rise or fall, but a more fundamental judgment: what kind of prosperity is the current AI boom? This judgment will determine the direction of the Fed's policy and also define Powell's historical position. On June 19, journalist Nick Timiraos, known as the "New Federal Reserve News Agency", stated that there are two diametrically opposed interpretations in the economic community regarding the AI boom: one believes that the productivity dividend is about to be realized, supply will catch up with demand, and the Fed can stand still and wait for inflation to naturally fall; the other believes that the benefits of increased productivity are still in the distance, while the demand shock has already arrived, and if the Fed waits for data confirmation, it will miss the best intervention window and be forced to raise rates more significantly. The Fed maintained interest rates unchanged this week, but in the latest dot plot, nearly half of the officials expect further rate hikes this year, while the rest of the officials hold the opposite judgment - the deep internal discord reflects the high uncertainty of this core issue. Powell's own inclination is vaguely visible in the press conference. He has repeatedly emphasized that "strong productivity-driven growth is not what we fear, but what we embrace," echoing the Greenspan-style thinking of 1996. However, the macroeconomic environment he faces - tariff pressures, expanding fiscal deficits, fading globalization dividends - is far different from the smooth sailing background of Greenspan's era. Making the correct judgment between the two historical scripts will be Powell's first real test at the helm of the Fed. Two versions of the 1990s: the dual legacy left by Greenspan Timiraos stated that Powell has repeatedly referred to the 1990s as a historical reference over the past year, but the decade itself contains two very different stories. In 1996, Greenspan faced rapid economic expansion and chose to stand still. He judged that rapid growth would not ignite inflation, and he was proven right. The economic expansion continued for many years, earning him the reputation of a "maestro". In 1999, Greenspan changed his judgment. With the stock market soaring and the labor market tightening, he began to raise interest rates continuously, eventually ending with the bursting of the dot-com bubble. It was also in this year that the Fed established the "forward guidance" mechanism of "signaling rate hikes in advance" - a practice that continues to this day and that Powell has explicitly stated he hopes to abolish. The Trump administration openly praises the 1996 version of the Fed, and Powell has also publicly stated before taking office that he hopes to create a central bank that is "confident enough to do less." However, the current economic situation may be delivering a different script to him. Powell's logic of judgment: believing in narrative, not waiting for data Before taking office, Powell expressed his concerns on Fox Business about the Fed making the "sixth or seventh major mistake" - prematurely tightening monetary policy in a productivity boom that should have been allowed to flourish. According to Timiraos, his core argument is that the productivity gains from AI will not immediately be reflected in official statistics and may take several years to materialize. If the Fed insists on waiting for data confirmation, it will mistake a benign prosperity for economic overheating and raise rates - which will strangle the growth momentum that could have suppressed inflation. The essence of this logic is advocating for using forward-looking narratives instead of lagging data as the basis for decision-making. Powell continued this line of thinking at the press conference: when asked whether AI is currently boosting demand or expanding supply, he only said that "demand is easier to measure than supply," deliberately avoiding a clear statement while sticking to the communication principle of "not revealing the next move in advance." Even if Powell's judgment turns out to be correct, the analogy to the 1990s is not complete, according to Timiraos. When Greenspan made that famous bet in 1996, he had multiple tailwinds behind him: cheap goods and labor from overseas continually suppressed inflation, and the federal fiscal deficit was also narrowing. These structural factors provided an additional safety margin for the Fed's "wait-and-see" approach. Powell is facing a completely different environment: tariff policies are pushing up import costs, fiscal deficits are expanding rather than contracting, and the dividends of globalization have faded. This means that even if the AI productivity dividend materializes as expected, the inflation pressures Powell will endure during the waiting process will be much greater than what Greenspan faced back then. Counterarguments: the "over-expectation" model of the Chicago Fed Timiraos pointed out that the most systematic challenge to Powell's judgment logic comes from Chicago Fed President Austan Goolsbee. According to the Wall Street Journal, Goolsbee raised a key distinction at a conference at Stanford University last month: whether the Fed can stand still in a productivity boom depends on whether this boom is beyond expectations. A prosperity that everyone can foresee will have the opposite effect - people will consume future wealth ahead of time, leading to economic overheating before the productivity dividend is realized. "In the end, you have to raise rates significantly, well beyond what you would need if you acted sooner," Goolsbee said. He believes that the current AI boom falls into this "visible to all" category. Surveys of economists, tech professionals, and the general public all show that the market generally expects AI to bring about a one percentage point increase in productivity annually, with most of the benefits still in the future. According to his model, this expectation itself constitutes a reason for raising rates, rather than lowering them. Goolsbee also cited real-life "overheating signals": AI data center construction is pushing up land, electricity, and chip prices, while raising the cost of electricians and equipment, squeezing resources from other industries. Apple announced this week that it would raise prices due to rising costs, which he sees as evidence that this mechanism is in operation. It is worth noting that Goolsbee's framework is not without challengers. Fed Governor Christopher Waller pointed out at the same Stanford conference that the "over-expectation" mechanism can work if people can borrow to consume in advance. But in reality, the spending of many households is strictly constrained by current income, making it difficult to easily realize future wealth. "If they cannot pre-spend that portion of their expenditures, the whole mechanism will be cut off," Waller said. This rebuttal provides theoretical support for Powell's "stand still" position: if borrowing constraints are widespread, the demand front-loading effect will be significantly reduced, making it more likely that the productivity boom will lead to supply expansion in a moderate manner, rather than sparking inflation. The ultimate paradox: abolishing forward guidance or being forced to use it Furthermore, Timiraos believes that Powell's leadership at the Fed also faces a deep-seated paradox, and this paradox stems from the thing he most wants to change. He has explicitly stated his desire to create a Fed that does not "tip its hand in advance", reducing forward guidance and keeping markets guessing. However, the Fed's current forward guidance mechanism was established in 1999 - when Greenspan began signaling rate hikes in advance to avoid catching the market off guard. If the economic outlook is as optimistic as described by the Trump administration, Powell may never need to signal rate hikes in advance. But if the economy takes a different turn, he will face a dilemma: either continue to use the forward guidance practice he hopes to abolish, informing the market in advance of rate hike plans, or remain silent, let the market speculate on the magnitude and pace of rate hikes on its own, and bear the risk of causing violent fluctuations in the financial markets as a result. The solution to this paradox ultimately depends on the answer to the same question: Is it 1996 or 1999 now? This article is reproduced from "Wall Street News" with the author: Dong Jing; GMTEight editor: Yan Wencai.