The supply shock argument
Hunstad’s argument rests on a concept economists call a positive supply shock – an event that dramatically increases the productive capacity of the economy, allowing more goods and services to be delivered at lower cost. When that happens, prices fall not because demand is being suppressed by high interest rates, but because the economy is simply producing more efficiently.
Read next: Oil crisis could push back rate cuts, warns Fed’s Goolsbee
The historical template he and others invoke is the 1990s, when the widespread adoption of computing and internet technologies transformed business operations across virtually every sector. Productivity surged. Inflation remained subdued even as unemployment fell to multi-decade lows. Alan Greenspan, then chairing the Federal Reserve, took the celebrated – and at the time controversial – decision to hold rates steady rather than tighten, betting that the technology wave was structurally changing what the economy could deliver without overheating.
“If even a portion of those [AI efficiency gains] actually materialise on an economy-wide basis,” Hunstad told the FT, “it could be one of the biggest positive supply shocks we’ve ever seen.” The implication for inflation is direct: if AI delivers the productivity gains that its proponents forecast, companies would be able to produce more at lower unit costs, easing the price pressures that have kept the Fed on hold and mortgage rates elevated.
Hunstad’s position finds powerful reinforcement in Washington. Donald Trump’s nominee to succeed Jerome Powell as Fed chair, Kevin Warsh, has described the AI boom as “the most productivity-enhancing wave of our lifetimes – past, present and future.” Warsh argues explicitly that, as in the Greenspan era, the Fed should incorporate the expected disinflationary benefits of AI into its policy framework now rather than waiting for the data to arrive – allowing rates to fall further and faster than current projections suggest. “Everything technology touches gets cheaper,” Warsh said in a 2025 interview. “If a central banker waits until the data shows an increase in productivity, my view is you’re backward-looking, you’re going to be late.”