Chicago Fed President Austan Goolsbee said the aftermath of a financial bubble bursting "could be ugly," depending on the level of leverage. He made the remarks when asked what a potential bursting of the artificial intelligence (AI) trade might look like.

Speaking on Semafor's "Compound Interest" podcast, Goolsbee described a conditional scenario in which fundamentals do not support current valuations and the AI trade proves to be a bubble. He noted that the United States has experienced bubbles before, including some recent ones, and that the bursting process "could be ugly," depending on the associated leverage.

Goolsbee's position is noteworthy. He is not a voting member of the FOMC this year, but he will gain a vote in 2027, and he has previously opposed rate cuts out of concern over inflation risks. His remarks represent early vigilance within the Fed regarding the inflationary effects of AI.

Why the Internet Era Was Mentioned

Goolsbee said the bursting of the AI trade could resemble the experience of internet infrastructure investment. He recalled that infrastructure at the time was built on expectations of 20% annual growth, while actual annual growth was only 7%—still fairly strong, but builders overbuilt on a massive scale, leaving behind excess capacity. Goolsbee said the overbuilding of the internet era was slightly different from "old-fashioned bubbles."

When asked about former Fed Chairman Alan Greenspan's view that the Fed cannot prick a bubble in real time without causing broader economic pain, Goolsbee said economists are sharply divided over whether the Fed should prevent bubbles, prick them, or clean up afterward.

AI Spending and Inflation Concerns

Goolsbee also expressed growing concern that AI investment is becoming a source of old-style overheating demand. He cited conversations with businesses in Illinois, which reported difficulty finding electricians, high construction costs, and one-year waiting lists for electrical components due to competition for resources with data centers.

Goolsbee distinguished between data center activity crowding out other sectors and the broader economy overheating. He said AI has not yet overheated aggregate demand, but it is beginning to have that effect. Current conditions are starting to feel like broad overheating, with rising AI data center costs spilling beyond directly related industries. He warned that further spillover into general services would pose a problem.

Rate Cut Path Could Be Complicated

Goolsbee said that if there is evidence inflation is moving back toward the 2% target while full employment is maintained, rates can fall. But he warned that rising services inflation and AI demand spilling out of its own lane and overheating the broader economy could complicate the path to rate cuts. "The more you see services inflation rising, the more you see AI demand jumping its tracks and overheating other parts of the economy, the more difficult it gets," he said.