WASHINGTON—Alan Greenspan presided over one of the longest stretches of near-optimal economic performance in modern US history as chair of the Federal Reserve from 1987 to 2006. He also was at the helm during economic turmoil, including the dot-com tech bubble in the late 1990s and early 2000s.
Greenspan—who died Monday at the age of one hundred—leaves a legacy of both positive and negative lessons, and the current Federal Reserve leadership, under newly installed Chair Kevin Warsh, should take both on board. One notable danger now, as it was during Greenspan’s time, is getting the economy right but being wrong on financial stability risks.
Greenspan’s positive lessons
Greenspan was renowned for his attention to detail and his thorough analysis of economic data. As Federal Reserve chair, he was able to connect the dots of anecdotal evidence about capital goods orders and information technology investment using piecemeal firm-level data on productivity and profit improvement. With this data, he concluded early on that the internet investment boom in the late 1990s would lead to a sustained improvement in US productivity after some time lag. Based on this assessment, he resisted the urge to raise interest rates in 1996 and 1997, despite a tightening labor market. He was especially motivated by the fact that the consumer price index (CPI) rate started to moderate from above 3 percent in late 1996 to 1.7 percent by the end of 1997. His views were validated when productivity growth surged from 1.5 percent in the early 1990s to 2.5–3 percent from 1996 to 2004. This productivity improvement, together with China being integrated into world trade helping to lower goods prices, allowed his overall monetary accommodation to deliver an enviable average annual growth of 3 percent in both gross domestic product (GDP) and the consumer price index during his 18.5 years as Federal Reserve chair.
This positive economic track record under Greenspan, which was underpinned by technologically induced productivity improvement, is relevant to the present episode of strong artificial intelligence (AI) investment—but under different circumstances. AI investment, mostly by a handful of tech conglomerates, has accelerated in recent years and is expected to reach nearly three trillion dollars by 2028, according to Morgan Stanley. It is on pace to account for more than one-third of US economic growth. There have been signs of improving productivity, especially among companies actively using AI tools for coding, customer service, marketing, research, and administrative tasks. Importantly, labor productivity growth has accelerated to 2-3 percent per year since 2024, compared with an annual average of 1.5 percent in the previous ten years. However, consumer prices have risen since late 2025, to reach 4.2 percent year-over-year in May 2026, with core CPI excluding volatile food and energy costs increasing by 2.9 percent.
As a result, the Federal Reserve faces the difficult problem of determining whether the current pick-up in inflation is transitory. A temporary increase could, for example, be driven by the rise in energy prices due to the war in Iran, but against a backdrop of improving productivity that will eventually offset increasing price pressures. But while it is tempting to follow Greenspan’s footsteps in being patient to accommodate the gradual improvement in productivity, this approach risks repeating the Federal Reserve’s mistake in 2021, which triggered sharp rises in inflation, reaching 9.1 percent in June 2022.
Greenspan’s negative lessons
Even more than his attention to detail, Greenspan was known for his free-market ideology, which prized unregulated, competitive markets. Yet in an October 2008 congressional hearing, Greenspan admitted that his anti-regulation ideology was flawed. In particular, he said, it was unwise to push for the deregulation of new financial products like credit default swaps, which played a key role in the global financial crisis of 2008.
This lesson is especially relevant today, when key members of the Federal Reserve Board, such as Vice Chair for Supervision Michelle Bowman, have argued for a relaxation of the 2023 draft implementation of the Basel regulatory framework. There seems a particular focus on eliminating possible overlapping bank capitalization requirements and recalibrating risk weights leading to a lowering of capital requirements, an argument that echoes similar demands by banks. This argument may have some merits, but it should be viewed in the context of several notable signs: overvaluation in a handful of high-tech stocks (raising concentration risk), tightened credit spreads, growing leveraging (especially by hedge funds), and diminishing transparency due to the growth of private credit markets. All of these factors pose risks to financial stability.
Given the concerns sketched above, Greenspan’s regulatory experience is quite relevant. It is important to get the balance right—between overregulation impeding the flow of credit to the economy and failures to provide adequate regulatory safeguards to incipient financial stability risks. An ideologically driven approach to financial regulation risks repeating Greenspan’s mistake.
Greenspan’s strategic ambiguity
Besides his economic and regulatory track records, Greenspan was instrumental in starting to enhance the transparency of Federal Reserve decision making. Under previous chairs, the Federal Reserve did not issue a public statement right after Federal Open Market Committee (FOMC) meetings. Instead, policy shifts were revealed through open market operations, and brief meeting minutes were released with a delay. Greenspan believed that excessive clarity could reduce policy flexibility, becoming famous with his “Fed speak” of opaque statements. But in 1994, the Federal Reserve began to announce policy-rate decisions right after FOMC meetings, and more information about Fed deliberations was forthcoming.
Ben Bernanke, who immediately followed Greenspan as Federal Reserve chair, and his successors further evolved the institution’s transparent communication approach. This included implementing regular post-meeting statements and press conferences. It also included giving forward guidance about the future path of interest rates by publishing the “dot plot” and quarterly economic projections, as well as providing explanations about the Fed reaction function. This communication strategy was carried out with the aim of anchoring inflation expectations by improving predictability.
Given these developments, Warsh has criticized excess forward guidance as limiting policy flexibility. He has said markets focus too much on dot plots, interpreting them as promises, and he has expressed his concern that markets are becoming dependent on Federal Reserve statements. In particular, he has said he would prefer market participants to analyze economic data themselves, instead of Federal Reserve announcements and speeches. In this, Warsh may be closer to Greenspan’s communication approach, representing a break with Federal Reserve practice since Bernanke. It remains to be seen if Warsh’s “less is more” communication approach will increase market volatility or impact the efficacy of monetary-policy transmission.