Fed's Goolsbee: Bursting bubble 'could be ugly,' depends on leverage, AI demand starting to overheat

Chicago Fed President Austan Goolsbee said the fallout from a bursting financial bubble "could be ugly," depending on the level of leverage. He made the remarks when asked what a potential unwind of the artificial intelligence (AI) trade might look like. Speaking on Semafor's "Compound Interest" podcast, Goolsbee described a conditional scenario in which fundamentals do not support current valuations and the AI trade proves to be a bubble. He noted that the U.S. has experienced bubbles before, including some recent ones, and that the bursting process "could be ugly," depending on the associated leverage. Goolsbee's position is noteworthy. He is not an FOMC voter this year, but will gain voting rights in 2027, and has previously opposed rate cuts over concerns about inflation risks. His remarks represent early vigilance within the Fed about the inflationary effects of AI. Why the internet era was mentioned Goolsbee said an AI trade bust could resemble the experience of internet infrastructure investment. He recalled that infrastructure at the time was built on expectations of 20% annual growth, while actual annual growth was only 7%still quite strong, but builders massively overbuilt, leaving excess capacity. Goolsbee said the overbuilding of the internet era was slightly different from a "classic bubble." Asked about former Fed Chair Alan Greenspan's view that the Fed cannot prick a bubble in real time without causing broader economic pain, Goolsbee said economists are deeply divided over whether the Fed should prevent bubbles, prick them, or clean up afterward. AI spending and inflation concerns Goolsbee also expressed growing concern that AI investment is becoming a source of old-fashioned overheating demand. He cited conversations with businesses in Illinois, saying companies report difficulty finding electricians, high construction costs, and one-year waiting lists for electrical components due to competition for resources with data centers. Goolsbee distinguished between data center activity crowding out other sectors and the broader economy overheating. He said AI has not yet overheated aggregate demand, but is beginning to have that effect. Current conditions are starting to feel like general overheating, with rising AI data center costs spilling beyond directly related industries. He warned that further spillover into general services would pose a problem. Rate-cut path could be complicated Goolsbee said rates could fall if there is evidence that inflation is moving back toward the 2% target while maintaining full employment. But he warned that rising services inflation and AI demand spilling out of its own lane and overheating the broader economy could complicate the path to rate cuts. "The more you see services inflation rising, the more you see AI demand jumping its tracks and overheating other parts of the economy, the harder it gets," he said.