The Chicago Fed president recalled internet infrastructure built around expectations of 20% annual growth, which left an overhang when those expectations changed.
- Goolsbee said AI business investment has not been very sensitive to interest rates so far, but appears to be becoming more debt-financed.
- He cited electrician shortages and one-year waiting lists for electrical components as businesses compete with data centers for resources.
- Goolsbee said he dissented against a late-2025 rate cut because he wanted evidence inflation was going away.
Chicago Federal Reserve President Austan Goolsbee said financial bubble unwinds can get ugly depending on leverage, when asked what a potential unwinding of the artificial intelligence (AI) trade might look like.
Speaking on Semafor’s Compound Interest podcast, Goolsbee described a conditional scenario in which the fundamentals are not there and the AI trade proves to be a bubble.
He noted that the U.S. has experienced bubbles before, including in the recent past, whose unwinds “can get ugly” depending on the leverage associated with them.
Why Goolsbee Recalled The Internet Era
Goolsbee said an AI unwind could resemble the experience with internet infrastructure investment.
He recalled infrastructure being built around expectations of 20% annual growth, only for the growth rate to come in at 7% annually, which he described as still pretty strong. However, builders massively overbuilt, leaving an overhang.
Goolsbee said the internet-era overbuilding, where growth fell short of expectations, was “slightly different” from an “old-fashioned bubble.”
Asked about Former Fed Chair Alan Greenspan’s view that the Fed could not deflate bubbles in real time without causing wider economic pain, Goolsbee said economists have a very significant debate about whether the Fed should prevent bubbles, pop them or clean up afterward.
AI Spending And Inflation Concerns
The Fed president also expressed increasing nervousness that AI investment was becoming a source of old-fashioned overheating demand.
He cited conversations with Illinois businesses reporting difficulty finding electricians, elevated construction costs and one-year waiting lists for electrical components amid competition with data centers.
Goolsbee distinguished between increased data-center activity at the expense of other sectors and overheating across the broader economy. He said AI had not overheated aggregate demand, but was starting to.
Conditions were starting to feel like aggregate overheating, with AI data-center cost increases spreading beyond directly related industries, he said, warning that further increases spreading into general services would be problematic.
What Could Complicate The Path To Rate Cuts
Goolsbee said rates could come down if there is evidence that inflation is heading back toward 2% while maintaining full employment. However, he cautioned that rising services inflation and AI demand spreading beyond its own sector to overheat the broader economy could complicate that path.
“The more you see services inflation going up and the more you see AI demand jumping out of its lane and overheating the rest of the economy, then it’s going to be a little dicier,” he said.
As of this writing, Nasdaq futures fell 0.7%, S&P 500 futures were down 0.1%, while Dow futures rose 0.8%. On Stocktwits, retail sentiment for the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 Index, and Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100 Index, remained ‘bullish’.
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