Back Research Notes The Academic Fed vs. the Inflation Target of the Future Published on August 18, 2025 By Jordi Visser A New Regime Shift All investors care about regime shifts. There are cyclical regime shifts and secular regime shifts. Cyclical shifts are shorter-term deviations from the larger trend, like we saw earlier this year when DeepSeek briefly disrupted the AI trade and tariff headlines stoked fears of the end of U.S. exceptionalism. Once tariffs shifted and compute needs accelerated, the broader AI regime reasserted itself. A secular regime shift, however, is far more powerful. It usually reflects dramatic changes in monetary policy, fiscal policy, and innovation. I believe we are in the early stages of one right now. From 2007 to 2009, the U.S. experienced such a shift, driven by fiscal austerity, unconventional monetary policy, and disruptive technology. Post-GFC, austerity dominated fiscal decisions, while QE reshaped central banking. At the same time, the smartphone revolution ignited a software boom and gave rise to the “Magnificent 7.” Software and growth dominated investment returns over the last 17 years. Back then, U.S. national debt hovered around $9 trillion, and deflation was the central fear. Today, debt has ballooned to $37 trillion, the deficit runs near 7% of GDP, and inflation, not deflation, is the dominant concern. Public anger over wealth inequality and declining opportunity is real. The current administration was elected on promises to restore balance and has responded quickly and aggressively with fiscal policy: tariffs and trade wars, onshoring manufacturing, expansive energy and nuclear policy, a broad-based Crypto Plan, and most of all, an AI Action Plan positioning artificial intelligence as the defining innovation of our time. Yet despite these moves, the administration does not believe that monetary policy and the Fed is aligned with the urgency of the moment. In a March 2024 paper, Stephen Miran, Chair of the Council of Economic Advisers and recently nominated to join the Federal Reserve Board in a temporary capacity, argued with Daniel Katz that the Federal Reserve and the Treasury need clearer structural alignment to avoid working at cross purposes. The authors warned that the Fed’s independence has drifted into insularity and groupthink, while the Treasury’s debt management decisions can undercut monetary policy. Their proposed reforms including shorter Fed governor terms, greater presidential accountability, congressional oversight of the Fed’s budget, and democratizing the governance of regional Reserve Banks were designed to bring the Fed and Treasury into a more accountable, coordinated framework. By better aligning fiscal and monetary institutions, Miran contended, policy would be both more effective and more responsive to the needs of the broader economy. Scott Bessent has described Jerome Powell’s Federal Reserve as “too academic.” At first, this might sound benign after all, who doesn’t want careful, model-driven rigor? But in the age of exponential innovation, being academic is a liability. An academic Fed looks backward, anchored to pre-AI models that assume the future will resemble the past. Today, those assumptions are obsolete. In this environment, “too academic” means backward-looking, slow, reactive, and dangerously disconnected from reality. The administration views the consequences of this stance as very real. Lower rates are clearly needed to help fund the deficit, but voters, particularly those who put Trump back in office, are feeling the pain of high rates. Housing affordability has become a major political issue heading into the midterms, and prolonged elevated rates are the driving factor: homeownership is slipping further out of reach. At the same time, small businesses are suffocating under credit costs, while large corporations with access to capital markets, are thriving, their profit margins supported by AI-driven efficiency gains. Labor’s share of national income has steadily declined, from roughly 64% in 2001 to about 55.8% in 2024, showing how profits are capturing a larger share of growth. Housing affordability is collapsing: homeownership now requires about 45% more of a typical buyer’s income compared to 2019, and median home prices hover at six times median income, up from 4–5× two decades ago. Mortgage costs have surged requiring an annual income of $126,670 to afford a median-priced home, compared to a median household income of just $80,610. And here lies the paradox: even when the Fed attempted to ease in September 2024, the transmission mechanism to long-term yields appeared broken. Despite a surprise 50 bps cut, 10-year Treasury yields rose rather than fell. Mortgage rates stayed stuck, offering no relief to households. The old academic assumption that cutting short rates would lower long rates may no longer hold under the weight of today’s debt and deficits. Recognizing this, the administration has floated trial balloons around cutting capital gains taxes on housing and creating channels for households to borrow at subsidized lower rates if long yields remain sticky. They have also loosened capital rules on banks to encourage more Treasury purchases, undoing parts of the GFC-era framework to help cap long-term yields. During the chaos after Liberation Day, stocks, bonds, and the dollar fell simultaneously, underscoring the reality that long-term yields will be harder to manage than in the post-GFC years. These moves underscore the political intent and urgency around bringing down yields and improving housing affordability and the recognition that an academic Fed alone cannot deliver it. On a recent All-In Podcast following the AI Action Plan, Bessent argued that the U.S. may be entering an environment reminiscent of the 1990s under Alan Greenspan, when rapid technological innovation allowed the Fed to “run the economy very hot” without sparking inflation. Just as the IT boom fueled non-inflationary growth three decades ago, today’s AI buildout could produce a similar dynamic. As Bessent put it: “Allan Greenspan was able to run the economy very hot in the 90s and because of the IT boom we had this very powerful non-inflationary growth. I think it’s highly likely we could have that now.” He emphasized that such growth would not only sustain higher output but also help “bring down the deficit very quickly.” The combination of wanting to run the economy hot now and lower rates due to future deflationary pressures of AI is about being forward-looking. The critique of the “too academic” Fed is targeting its rigid adherence to the 2% inflation target an orthodoxy born in the 1990s and treated as gospel ever since. Powell’s Fed has maintained that policy must remain tight until inflation returns to that level. His term as Chair runs until May 15, 2026, but the administration has signaled it will announce its nominee for the next Fed Chair in the coming weeks. Early contenders, in recent interviews, have delivered a consistent message: the Fed must evolve, becoming more forward-looking rather than bound by outdated models. This was emphasized by Bessent in a recent interview with Nikkei . He stressed that the Fed’s role is now expanding far beyond traditional interest-rate management. Because of this, the next Fed Chair must be someone capable of thoroughly examining the institution itself, not just inheriting old frameworks. Bessent argued the Fed’s leadership should be proactive and forward-looking, able to anticipate how structural changes such as AI-driven productivity, fiscal dynamics, and geopolitical pressures will reshape the economy. The next Fed Chair, in short, must be an adaptive leader prepared to rethink the Fed’s mission in light of rapid innovation and fiscal realities. Bessent’s belief that AI-driven productivity shifts demand a forward-looking Fed has real merit. AI is progressing at an unprecedented pace, and in a world defined by exponential innovatio