Greenspan's 1990's: No support for Warsh rate cuts

In our latest Focus report we look at monetary policy in the 1990's to see how former Fed Chairman Greenspan responded to the productivity surge at that time. For a copy of the report please email us on Info@Tricio-Advisors.com.

Incoming Fed Chairman Warsh reportedly believes that AI will bring another productivity acceleration and argues that this will allow the Fed to cut rates.

We conclude that yes, a surge in productivity growth could help to allow faster wage growth without causing inflation. It will, if it comes as hoped, make it easier to bring inflation back down to 2%.

However, in the 1990's rates were much higher than today and were mostly held 3.5-4% above the inflation rate, compared with less than 1% today. Greenspan did not actually cut rates during the productivity surge - he just didn't raise them, despite strong growth, rising wages and falling unemployment.

The conventional wisdom at the Fed is that the 'neutral rate of interest', the level that is neither expansionary nor restrictive is below the current level, centred around 3-3.25%. But strong growth as well as high investment due to spending on AI data centres would tend to raise the neutral rate. So a lot rides on this estimate of neutral. The risk is that the Fed runs the economy too hot, even given a strong supply side. Please ask us for a copy of the report for more details. Info@Tricio-Advisors.com