As 2026 begins, the most optimistic observers of the US economy are those seeking to become the next Federal Reserve chair. All see the technological gains stemming from artificial intelligence propelling the US towards rapid growth and higher living standards without inflation. For them, the late 2020s are a rerun of the 1990s.
Whether it is Kevin Hassett seeing “a productivity boom”, Kevin Warsh writing that AI will be a “significant disinflationary force” or Scott Bessent expecting “a 1990s scenario . . . [with] lower interest rates, higher growth and higher productivity”, all three think the new Fed chair can emulate Alan Greenspan. Justifying low interest rates, of course, is also a prerequisite to getting the job, since President Donald Trump has demanded lower rates.
It is important not to dismiss the productivity boom thesis entirely. Jay Powell, the incumbent, has also highlighted productivity improvements as the rationale for the Fed boosting its growth forecasts for 2026 by half a percentage point to 2.3 per cent in December. Powell said that US productivity growth had been “structurally higher for several years”. It is now improving output per hour far faster than most other advanced economies, where it has stagnated since the pandemic.