Powell Distinguishes AI Investment from Dotcom Bubble

Powell Dismisses AI Boom as a Bubble

Federal Reserve Chair Jerome Powell has made it clear that he does not view the current surge in artificial intelligence (AI) investment as a repeat of the dotcom bubble. During a press conference on Wednesday, Powell articulated that the ongoing wave of AI-related spending is firmly rooted in profitable businesses and tangible economic activities, rather than being driven by speculative enthusiasm.

“I won’t go into particular names,” Powell remarked to the media following the Federal Reserve's policy meeting, “but they actually have earnings. These companies … actually have business models and profits and that kind of thing. So it’s really a different thing” from the dotcom bubble, he emphasized.

His comments represent a significant acknowledgment that the corporate expansion in AI, which encompasses investments reaching into the hundreds of billions in sectors like data centers and semiconductors, has become a genuine engine of economic growth in the U.S.

AI Investment: A Structural Shift

Powell underscored that the recent explosion in AI spending is not being fueled by monetary policy or the availability of cheap capital, challenging the narrative that relaxed financial conditions might be creating an asset bubble in the tech sector.

“I don’t think interest rates are an important part of the AI or data center story,” he stated. “It’s based on longer-run assessments that this is an area where there’s going to be a lot of investment, and that’s going to drive higher productivity.”

This viewpoint suggests that the current AI expansion is more indicative of a structural transformation in the workforce rather than a temporary market frenzy. Companies like Nvidia, which is poised to generate half a trillion dollars in revenue, alongside Microsoft and Alphabet’s significant capital expenditure plans, are making unprecedented investments. According to Powell, this growth is not just speculative but is based on solid fundamentals.

Goldman Sachs echoes Powell’s sentiments. In a research note titled “The AI Spending Boom Is Not Too Big,” chief U.S. economist Joseph Briggs asserted that “anticipated investment levels are sustainable, although the ultimate AI winners remain less clear.”

Briggs and his team projected that the productivity gains brought about by AI could yield an estimated $8 trillion in present value for the U.S. economy, with potential high-end scenarios reaching as much as $19 trillion.

“We are not concerned about the total amount of AI investment,” the Goldman team noted. “AI investment as a share of U.S. GDP is smaller today (<1%) than in prior large technology cycles (2%–5%).” This indicates that there is still ample room for growth in this sector.

Powell’s perspective aligns with this view: the AI development race, though occasionally characterized by exuberance, is primarily financed through corporate cash flows rather than speculative borrowing.

Impact on the Real Economy

Powell highlighted that the wave of investment is manifesting in the real economy. “It’s the investment we’re getting in equipment and all those things that go into creating data centers and feeding the AI,” he noted. “It’s clearly one of the big sources of growth in the economy.”

These remarks resonate with estimates from the private sector. Economists at JPMorgan have also recognized the significant impact of AI investments on the economy, suggesting that the rise of AI is indeed a transformative economic force.

In conclusion, Jerome Powell's insights illustrate a major shift in how AI spending is perceived within the broader economic landscape. Rather than a fleeting bubble akin to the dotcom era, the current AI investment boom is seen as a stable and productive avenue for future growth.