President Donald Trump, his Treasury secretary, and his chosen nominee for Federal Reserve chair believe they can revive the U.S. economy to mirror the booming conditions of the 1990s. This optimism is founded on the potential of artificial intelligence (AI) to replicate the productivity surge observed during the internet's emergence. They envision a scenario where productivity significantly increases, unemployment falls, and inflation remains contained, akin to the economic bonanza of the 1990s.

Trump is confident that Kevin Warsh, his nominee for Fed chair, possesses the vision to unleash this economic growth by departing from what he perceives as the central bank's reluctance to aggressively lower interest rates. This view, however, faces considerable skepticism from many economists who highlight the stark differences between the current global economic landscape and that of the 1990s, when the Spice Girls dominated radio and "Titanic" topped the box office.

The Trump team's narrative attributes the 1990s boom largely to former Fed chair Alan Greenspan's prescience in keeping interest rates low. Economist Dario Perkins of TS Lombard, among others, argues that this is a "rather distorted version of what actually happened." Nonetheless, the administration believes history can repeat itself, provided there is a Fed chair with Greenspan's "foresightedness."

Trump has consistently criticized current Fed chief Jerome Powell for not lowering rates aggressively enough, especially with inflation hovering above the central bank's 2% target. Treasury Secretary Scott Bessent publicly stated in January that the president sought to replace Powell with someone possessing an "open, Greenspan-like mind," asserting that the nation could experience a productivity boom similar to the 90s if not "encumbered by a Federal Reserve which throws the brakes on."

Upon picking Warsh on January 30, Trump found an ally whose recent speeches and writings suggest that AI-driven improvements in productivity could indeed justify lower interest rates. This stance, while aligning with Trump's desires, marks a notable shift from Warsh's past as an inflation hawk. During the 2007-2009 Great Recession, as a Fed governor, Warsh had opposed central bank efforts to lower rates, wrongly predicting an acceleration of inflation despite unemployment exceeding 9%.

The core of the current debate revolves around productivity gains and AI's potential to dramatically amplify them. Economists understand productivity improvements as almost "magical"; new technology and machines make workers more efficient, leading to higher output per hour. This enables firms to increase earnings and raise wages without necessarily increasing prices, thus driving economic growth without spurring inflation.

In the mid-1990s, Alan Greenspan faced an unusual economic climate where wages were rising, yet inflation remained subdued. While productivity gains were a potential explanation, official government data did not initially reflect them. Other Fed policymakers, concerned about the sustainability of rising wages with tame inflation, advocated for raising interest rates. However, Greenspan suspected the official productivity numbers were incomplete, influenced by anecdotal evidence of efficiency improvements from companies investing in computers and the burgeoning internet.

Greenspan commissioned an extensive review of productivity data, which revealed an implausible story: services firms, from retailers to legal practices, had supposedly seen productivity fall despite intense competition and massive tech investments. Convinced the government's numbers were understating actual productivity, Greenspan successfully persuaded his Fed colleagues in September 1996 to postpone raising rates. Following this decision, the economy soared, with productivity advances eventually appearing in official data. American economic growth surpassed 4% annually from 1997 through 2000, and the unemployment rate dropped to a three-decade low of 3.8% in April 2000, all while inflation remained below 2% for 17 consecutive months between 1997 and 1999.

The question now is whether history can repeat itself. American productivity appeared robust in the second and third quarters of 2025, with some economists linking these improvements to early AI adoption and predicting greater gains ahead. Yet, others remain unconvinced. Joe Brusuelas, chief economist at RSM, contends that the 2025 productivity gains stem from investments in automation made during and after the COVID-19 pandemic to compensate for labor shortages, rather than AI. Martin Baily, senior fellow emeritus at the Brookings Institution and former chair of President Bill Clinton’s Council of Economic Advisers, believes AI's significant impact on business operations and national productivity will require considerable time due to the expense, risk, and learning curve associated with technological adoption and staff training.

Moreover, Federal Reserve Governor Michael Barr stated that a productivity boom, even from AI, might not justify lower interest rates. Businesses borrowing to invest in AI would exert upward pressure on rates, as would workers saving less and borrowing more in anticipation of higher wages from increased productivity. Barr concluded that the "AI boom is unlikely to be a reason for lowering policy rates." Significantly, even Greenspan's Fed eventually raised its benchmark rate from 4.75% to 6.5% in less than a year, starting in mid-1999. Perkins notes that Warsh and Bessent seem to focus solely on the "dovish 1995/96 version of Greenspan" while overlooking his "hawkish 1999/2000 variant."

The economic environment awaiting Warsh, should he be confirmed, is also considerably different from Greenspan's era. Greenspan avoided rate hikes during a time of rare U.S. government budget surpluses, eliminating the urgent need for borrowing. Today, persistent spending hikes and tax cuts have led to accumulating deficits, with federal debt projected to hit a historic 120% of America's GDP by 2035. Furthermore, the 1990s benefited from globalization, falling tariffs, and surging immigration, factors that helped control inflation. Now, largely due to Trump's own policies, including sweeping import taxes and immigration crackdowns, "trade barriers are going up," and "globalization has given way to de-globalization," according to Perkins. Michael Pearce, chief U.S. economist at Oxford Economics, succinctly puts it: "That benign era is clearly behind us." These differences suggest potential clashes at the central bank, with figures like Austan Goolsbee, president of the Federal Reserve Bank of Chicago, noting that the analogy to the late 90s is "a little harder for me to understand," emphasizing that Greenspan's insight was about holding off on rate hikes, not slashing them.