The spectacle of Kevin Warsh testifying before Congress on Tuesday to declare inflation a relic of the past 9 while the economy simultaneously generates the very price pressures that could prove him wrong is the defining paradox of this moment. The new Fed chair is promising victory, but the battlefield is shifting beneath his feet.
The clearest signal of this tension comes from the artificial intelligence boom, where capital expenditure exceeding $700 billion is now driving up electronics prices and straining energy grids 3. This is not a demand-side inflation of the kind central banks know how to tame. It is a structural, supply-side phenomenon born of industrial policy by another name—the state-led, market-funded race to build AI infrastructure. When the Fed raises rates to cool an economy overheating from data center construction, it risks crushing the very investment it is supposed to encourage.
The winners and losers are already separating. Wall Street, having priced in the AI narrative, is now pivoting to efficiency plays 3. But the real economy is less forgiving. Volkswagen’s confirmation that it may cut up to 100,000 jobs 24—double the earlier figure—reveals a manufacturing sector that cannot pass its cost disadvantages on to consumers. The 20% gap with competitors is structural, not cyclical. Meanwhile, absenteeism cost the Spanish economy €59 billion in 2025, nearly double the pre-pandemic level 7, suggesting that labor markets are fraying even before the full force of restructuring hits.
The institutional incentives are misaligned. The Fed, under Warsh, is reverting to a hawkish script that worked in the 1980s but may be ill-suited to an economy where the largest investment cycle in decades is itself inflationary. The European Central Bank, by contrast, is moving toward a digital euro pilot with 36 payment service providers 5, a quiet but profound bet on state capacity in monetary infrastructure. The contrast is instructive: one central bank fights yesterday’s war; the other prepares for tomorrow’s.
Comparing models, the divergence is stark. Japan’s bond yields have hit multi-decade highs as the Bank of Japan normalizes policy and pension funds consider shifting to domestic assets 11. This is a managed unwinding, not a crisis. The United States, however, is attempting monetary tightening alongside an industrial policy that pours gasoline on the fire. The antitrust lawsuit by 12 states to block the Paramount-Warner Bros. merger 18 suggests that at least some policymakers recognize the concentration risks embedded in this model, but the suit is about media competition, not the deeper structural concentration of capital in AI.
The strategic implication is uncomfortable: the era of cheap, non-inflationary growth is over. The tradeoff that matters most is between monetary credibility and industrial ambition. Warsh can have his victory lap, but only if he acknowledges that the inflation he promises to end may be the very engine of the growth he is supposed to protect. The reader should ask: what happens when the Fed’s tools cannot distinguish between a bubble and a building spree?