WASHINGTON (AP) — President Donald Trump, his Treasury secretary and his choice to lead the Federal Reserve believe they can coax the U.S. economy into partying like it’s 1999.
They are putting their faith in artificial intelligence to duplicate what happened when another technology arrived in the 1990s: the internet. Back then, the American economy surged as businesses became more productive, unemployment tumbled and inflation remained in check.
Trump is confident that his nominee to become Fed chair, Kevin Warsh, can unleash an even greater economic bonanza by jettisoning what the president sees as the central bank’s hidebound reluctance to slash interest rates.
Many economists are skeptical.
The world looks a lot different today than it did when the Spice Girls ruled radio and “Titanic’’ dominated the box office. And the story the Trump team is telling — that a visionary Fed chair, Alan Greenspan, fueled the ‘90s boom by keeping interest rates low — is incomplete at best.
“The administration is offering a rather distorted version of what actually happened in the 1990s,’’ economist Dario Perkins of TS Lombard said in a commentary.
Nonetheless, the Trump administration believes history can repeat itself. All that's been missing, in the president’s view, is a Fed chair with Greenspan’s foresightedness.
Trump has repeatedly attacked current Fed chief Jerome Powell, whose term as chair ends in May, for his reluctance to lower rates aggressively while inflation hovers above the central bank’s 2% target. Treasury Secretary Scott Bessent said on social media in January that the president sought to replace Powell with someone with “an open, Greenspan-like mind."
"Our nation can see productivity boom like we did in the ’90s when we are not encumbered by a Federal Reserve which throws the brakes on,'' Bessent said.
On Jan. 30, Trump said he was picking Warsh.
In speeches and writings, Warsh has argued that AI-driven improvements in productivity could justify lower interest rates.
These views align with Trump’s desires for Fed rate cutes but mark a break with Warsh's own past as an inflation hawk. In the aftermath of the 2007-2009 Great Recession, Warsh — then a Fed governor — objected to some of the central bank’s efforts to help the struggling economy by pushing down rates even though unemployment exceeded 9%. Warsh warned then, wrongly, that inflation would soon accelerate.
At issue now are gains in productivity and the possibility that AI will make them bigger — much bigger.
To economists, productivity improvements are almost magical. When companies roll out new machines or technology, their workers can become more efficient and produce more stuff per hour. That allows firms to earn more and to raise employees’ pay without raising prices. In short: Surging productivity can drive economic growth without spurring inflation.
In the mid-1990s, Greenspan was contending with a strange set of economic circumstances: Wages were rising, but inflation wasn’t heating up.
Big productivity gains might have explained things, but government data showed no sign of them. Other Fed policymakers worried that surging wages and tame inflation couldn’t co-exist and that higher prices were coming. They wanted to raise interest rates.
But Greenspan suspected the official productivity numbers were missing something. For one thing, they didn’t jibe with the amazing tales of efficiency improvements the Fed was hearing from companies investing in computers and turning to the internet.
So he ordered his lieutenants to dig through decades of productivity numbers. The official statistics they assembled told an implausible story: Services firms — from retailers to legal practices — had supposedly seen productivity fall over the years, despite intense competitive pressure and massive investments in technology.
Greenspan didn’t believe it. He persuaded his Fed colleagues that the government’s numbers were wrong and were understating productivity. They agreed in September 1996 to hold off on raising rates.
The economy took flight.
Tardily, productivity advances began to show up in the official data. Overall, American economic growth surpassed 4% every year from 1997 through 2000, something it would do again only once in the next quarter century. The unemployment rate plunged to 3.8% in April 2000, lowest in three decades. Inflation stayed in its cage, coming in below 2% -- later the Fed’s official target – for 17 straight months in 1997-1999.
American productivity certainly looked strong in the second and third quarters of 2025, and some economists attribute the improvements to early adoption of AI; they see bigger gains and stronger economic growth ahead.
Others aren’t so sure.
Joe Brusuelas, chief economist at the consulting firm RSM, wrote that the 2025 productivity improvements “are not because of artificial intelligence’’ but reflect investments in automation that companies made when they couldn’t find enough workers during and after the COVID-19 pandemic. “Those investments are starting to pay off,’’ Brusuelas wrote.
Economist Martin Baily, senior fellow emeritus at the Brookings Institution, believes it will take time for AI to have a big impact on the way companies do business and on the nation’s productivity.
“Companies don’t change that fast,” said Baily, chair of President Bill Clinton’s Council of Economic Advisers. “It’s expensive to change. It’s risky to change. The managers don’t necessarily understand the new technology that well. So they have to learn how to use it. They have to train their staff. All that stuff takes a long time.’’
A productivity boom can raise the economy’s speed limit — how fast it can grow without pushing prices higher. But it might not justify lower interest rates, Federal Reserve Gov. Michael Barr said in a speech earlier this month.
Businesses will borrow to invest in AI, putting upward pressure on interest rates. Likewise, American workers and their families likely would save less and borrow more in anticipation of higher wages, the payoff for being more productive; that would put still more pressure on rates to rise.
Bottom line, Barr said: “The AI boom is unlikely to be a reason for lowering policy rates.’’
Even Greenspan's Fed eventually came to the same conclusion, reversing course and starting to raise its benchmark rate in mid-1999, taking it from 4.75% to 6.5% in less than a year. (The rate Trump complains about now is around 3.6%.)
“Warsh and Bessent talk only about the dovish 1995/96 version of Greenspan; they overlook the hawkish 1999/2000 variant,’’ Perkins wrote.
Many of Warsh’s potential future colleagues on the Fed’s interest-rate setting committee see the late 1990s experience differently than he does, setting up what could be a clash at the central bank if the Senate confirms Warsh as chair.
Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said earlier this week that “the analogy to the late 90s is a little harder for me to understand.” Greenspan’s insight was that productivity gains meant the Fed could hold off on raising rates, not that it should slash them, Goolsbee noted.
“It wasn’t, ‘Should we cut rates because productivity growth is higher?’” he said.
The economic backdrop that awaits Warsh is also far less friendly than the one Greenspan enjoyed.
Greenspan was avoiding rate hikes at a time when the usually profligate U.S. government was running rare budget surpluses and didn’t need to borrow so desperately. Now, after a series of spending hikes and tax cuts, deficits are piling up year after year, and the Congressional Budget Office expects federal debt to hit a historic high of 120% of America’s GDP by 2035.
Nor was productivity the only thing controlling inflation in the 1990s. Countries were lowering tariffs and dismantling trade barriers. Immigration was surging.
Now, thanks largely to Trump’s own policies, notably his sweeping taxes on imports and his crackdown on immigration, the world is much different. “Trade barriers are going up,’’ Perkins wrote. “Globalization has given way to de-globalization.’’
“That benign era is clearly behind us,’’ said Michael Pearce, chief U.S. economist at Oxford Economics.
AP Economics Writer Christopher Rugaber contributed to this story.
FILE - Economist Alan Greenspan, chairman of the Federal Reserve from 1987 to 2006, is seen in his office in Washington, Oct. 18, 2013. (AP Photo/J. Scott Applewhite, File)
FILE - Kevin Warsh speaks to the media about his report on transparency at the Bank of England, in London, Dec. 11, 2014. (AP Photo/Alastair Grant, Pool, File)
DUBAI, United Arab Emirates (AP) — Israel and Iran traded strikes Sunday as part of a widening war after the killing of Iran's Supreme Leader Ayatollah Ali Khamenei in a surprise U.S. and Israeli bombardment a day earlier.
Blasts in Tehran — whose target was not immediately clear — sent a huge plume of smoke into the sky in an area where there are government buildings. Iranian authorities say more than 200 people have been killed since the start of the U.S. and Israeli strikes that killed Khamenei and other senior leaders. Earlier, Iran fired missiles at an ever-widening list of targets in Israel and Gulf Arab states in retaliation.
Loud explosions caused by missile impacts or interceptions could be heard in Tel Aviv. Israel’s rescue services said eight people were killed and 28 wounded in a strike in the central town of Beit Shemesh, bringing the overall death toll in the country to 10.
Meanwhile, Iran’s President Masoud Pezeshkian said in a prerecorded message aired on state television that a new leadership council “has begun its work.” Iran's Foreign Minister Abbas Araghchi told the Al Jazeera network that a new supreme leader will be chosen in “one or two days.”
The killing of Khamenei, and U.S. President Donald Trump's calls for the overthrow of the decades-old Islamic Republic, marked the start of a stunning new U.S. intervention in the Middle East and potentially a prolonged war.
It is also a startling show of military might for an American president who swept into office on an “America First” platform and vowed to keep out of “forever wars.” It was the second time in eight months that the Trump administration has joined Israel in using military force against Iran.
In a 12-day war in June, Israeli and American strikes greatly weakened Iran’s air defenses, military leadership and nuclear program. But the killing of Khamenei and several top security officials creates a leadership vacuum, increasing the risk of regional instability.
“You have crossed our red line and must pay the price,” Iran’s parliamentary speaker, Mohammad Bagher Qalibaf, said in a televised address Sunday. “We will deliver such devastating blows that you yourselves will be driven to beg.”
Trump warned that any retaliation would only lead to further escalation.
“THEY BETTER NOT DO THAT,” Trump fired back in a social media post. “IF THEY DO, WE WILL HIT THEM WITH A FORCE THAT HAS NEVER BEEN SEEN BEFORE!”
In a sign of how the attack could stoke regional unrest, hundreds of people stormed the U.S. Consulate in Pakistan’s port city of Karachi on Sunday. Police and paramilitary forces used batons and fired tear gas to disperse the crowd, and at least nine people were killed in the clashes, authorities said.
As U.S. and Israeli strikes have pounded Iran, the Islamic Republic has retaliated with missiles and drone attacks on Israel and nearby Arab Gulf countries hosting U.S. forces.
The air war could rattle global markets, particularly if Iran makes the Strait of Hormuz unsafe for commercial traffic. Around 20% of the world's traded oil passes through the vital waterway, and oil prices are already set for swings.
In repeated barrages across Israel, at least 10 people were killed and more than 120 injured, according to authorities. Many missiles were intercepted, the military said.
Israel’s Defense Minister Israel Katz said Sunday that Israel will have “a non-stop air train” of strikes against military and leadership targets in Iran.
Flights across the Middle East were disrupted, and air defense fire thudded over Dubai. The United Arab Emirates’ commercial capital has long drawn business and expatriates by billing itself as a safe haven in a volatile region.
Shrapnel from Iranian attacks on the Emirates’ capital of Abu Dhabi killed two people, state media said, and debris from aerial interceptions caused fires at the city’s main port and on the facade of the iconic Burj Al Arab hotel.
Attacks also extended into Oman — Iran’s longtime interlocutor with the West that hadn’t been drawn into the fray previously.
Saudi Arabia condemned Iran’s attacks on its capital, Riyadh, and eastern region, saying it had successfully intercepted them. The kingdom noted that it had not allowed its airspace or territory to be used to target Iran.
Jordan said it “dealt with” 49 drones and ballistic missiles. Kuwait, Bahrain and Qatar also said they had intercepted projectiles Sunday morning.
In Iraq, a militant group claimed responsibility for a drone attack targeting American bases in Irbil, according to the Rudaw media outlet. Smoke could be seen from an area where the U.S. has an air base there, but it was not immediately clear whether it had been hit.
As supreme leader, Khamenei had final say on all major policies during his decades in power. He led Iran’s clerical establishment and the Revolutionary Guard, the two main centers of power in the governing theocracy.
Though Trump called on Saturday for the Iranian people to “take over” their government, there was no sign in Tehran or elsewhere of unrest.
Iran quickly formed a council to govern the country until a new supreme leader is chosen.
An Iranian diplomat told the United Nations Security Council that hundreds of civilians were killed and wounded in the strikes.
In southern Iran, at least 115 people were reported killed when a girls’ school was struck, and dozens more were wounded, the local governor told Iranian state TV.
Lt Col Nadav Shoshani, an Israeli military spokesperson, said he was not aware of any Israeli or American strikes in the area of the school. U.S. Central Command spokesperson Capt. Tim Hawkins said he was aware of those reports and that officials were looking into them.
Iran’s state news agency IRNA said at least 15 people were killed in the southwest, quoting the governor of the Lamerd region, Ali Alizadeh, as saying a sports hall, two residential areas and a hall near a school were hit.
As reports trickled out about Khamenei’s death, eyewitnesses in Tehran told The Associated Press that some residents were rejoicing, cheering from rooftops, blowing whistles and letting out ululations.
Mourners raised a black flag over the Imam Reza shrine in Mashhad and the Iranian government declared 40 days of public mourning and a seven-day nationwide public holiday to commemorate Khamenei’s death.
Citing unidentified sources, the semiofficial Fars news agency reported that several relatives of Khamenei were also killed, including a daughter, son-in-law, daughter-in-law and grandchild.
Tensions have soared in recent weeks as the Trump administration built up the largest force of American warships and aircraft in the Middle East in decades. The president insisted he wanted a deal to constrain Iran’s nuclear program while the country struggled with growing dissent following nationwide protests.
Democrats decried that Trump had taken action without congressional authorization. The White House said it had briefed several Republican and Democratic leaders in Congress in advance.
Though Trump had pronounced the Iranian nuclear program obliterated in strikes last year, the country was rebuilding infrastructure that it had lost, according to a senior U.S. official who spoke to reporters on condition of anonymity to discuss Trump’s decision-making process. The official said intelligence showed that Iran had developed the capability to produce its own high-quality centrifuges, an important step in developing the highly enriched uranium needed for weapons.
Iran has said it has not enriched since June — though it has maintained its right to do so while saying its nuclear program is entirely peaceful. It has also blocked international inspectors from visiting the sites the U.S. bombed. Satellite photos analyzed by AP have shown new activity at two of those sites, suggesting Iran is trying to assess and potentially recover material.
Lidman reported from Tel Aviv, Israel; Boak from West Palm Beach, Florida; and Tucker from Washington. Associated Press writers Joe Federman in Jerusalem, Aamer Madhani and Konstantin Toropin in Washington, Sam Mednick in Tel Aviv, Israel, Farnoush Amiri in New York, David Rising in Bangkok and AP journalists around the world contributed to this report.
Shiite Muslims hold the portraits of Iranian leaders during a rally to condemn the killing of Iranian Supreme Leader Ayatollah Ali Khamenei, in Quetta, Pakistan, Sunday, March 1, 2026. (AP Photo/Arshad Butt)
Iraqis hold a portrait of Iranian supreme Leader Ayatollah Ali Khamenei during a protest against U.S. and Israeli attacks on multiple cities across Iran, at a bridge leading to the fortified Green Zone where the U.S. Embassy is located, in Baghdad, Iraq, Sunday, March 1, 2026. (AP Photo/Hadi Mizban)
Israeli air defense system fires to intercept missiles during an Iranian attack over central Israel, Sunday, March 1, 2026. (AP Photo/Ohad Zwigenberg)
Israeli air defense system fires to intercept missiles during an Iranian attack over central Israel, Sunday, March 1, 2026. (AP Photo/Ohad Zwigenberg)
Government supporters chant slogans as they gather in mourning after state TV officially announced the death of Iranian Supreme Leader Ayatollah Ali Khamenei, in Tehran, Iran, Sunday, March 1, 2026. (AP Photo/Vahid Salemi)
A plume of smoke rises after a strike in Tehran, Iran, Sunday, March 1, 2026. (AP Photo/Vahid Salemi)
Smoke rises up after a strike in Tehran, Iran, Sunday, March 1, 2026. (AP Photo/Vahid Salemi)
Government supporters gather in mourning after state TV officially announced the death of Iranian Supreme Leader Ayatollah Ali Khamenei, in Tehran, Iran, Sunday, March 1, 2026. (AP Photo/Vahid Salemi)
Government supporters chant slogans as they gather in mourning after state TV officially announced the death of Iranian Supreme Leader Ayatollah Ali Khamenei, shown in the poster, in Tehran, Iran, Sunday, March 1, 2026. (AP Photo/Vahid Salemi)
Government supporters gather in mourning after state TV officially announced the death of Iranian Supreme Leader Ayatollah Ali Khamenei, in Tehran, Iran, Sunday, March 1, 2026. (AP Photo/Vahid Salemi)
Rescue workers and military personnel survey the scene of a direct hit a day after an Iranian missile struck in Tel Aviv, Israel, Sunday, March 1, 2026. (AP Photo/Oded Balilty)
A government supporter holds a picture of the Iranian Supreme Leader Ayatollah Ali Khamenei during a gathering after state TV officially announced the death of Khamenei, in Tehran, Iran, Sunday, March 1, 2026. (AP Photo/Vahid Salemi)
Israel's air defense missile fires to intercept missiles from Iran over Israel, Sunday, March 1, 2026. (AP Photo/Ariel Schalit)
Government supporters mourn in a gathering after state TV officially announced the death of Iranian Supreme Leader Ayatollah Ali Khamenei, in Tehran, Iran, Sunday, March 1, 2026. (AP Photo/Vahid Salemi)
Government supporters chant slogans as they gather in mourning after state TV officially announced the death of Iranian Supreme Leader Ayatollah Ali Khamenei, in Tehran, Iran, Sunday, March 1, 2026. (AP Photo/Vahid Salemi)
