Fed races to adapt to AI promises and pitfalls for jobs, inflation

Coding assistants might well improve employee productivity, but Block CEO Jack Dorsey said AI "paired with smaller and flatter teams, are enabling a new way of working which fundamentally changes what it means to build and run ​a ​company. And that’s accelerating rapidly.”

A growing body of research has consistently concluded that AI can perform a wide variety of tasks, including many in ​the knowledge sectors that have been a focus for high schools, colleges and local chambers ‌of commerce wanting to future-proof the labor force. A 2024 paper by Brookings Institution analysts found more than 30% of U.S. workers could see half of their job tasks "disrupted," percentages that have likely grown.

FED EFFORTS GATHERING STEAM

The Fed is trying to keep pace. An AI-driven count of Fed research articles and policymaker speeches about AI, machine learning and related topics shows few before ChatGPT's release in late 2022. That rose to five in 2023, around 17 last year, and 14 already this year, a much faster pace.

Minutes of the Fed's January meeting showed a fulsome discussion of productivity and AI, including what it might mean for monetary policy, and at least five policymakers spoke on the topic last month.

As a group, they are far from banking on AI as a reason to cut rates anytime soon. They agree productivity seems to be moving higher, but aren't ready to credit AI as opposed to more mundane efficiencies achieved during pandemic-era labor shortages.

Even if the "baton" of productivity is now being passed, ‌policymakers seem to be leaning toward a view that AI will cause structurally higher unemployment, not easily offset by lowering rates without risking ​higher inflation.

Underpinning the Fed's framework is a long-run "natural" unemployment rate, currently thought to be around 4.2%, below which inflation pressures build.

"If AI continues to raise ​productivity, economic growth could remain strong, even as churn in the labor market leads to an increase in unemployment. ​In a productivity boom such as this, a rise in unemployment may not indicate increased slack. As such, our normal demand-side monetary policy may not be able to ameliorate an AI-caused unemployment ‌spell without also increasing inflationary pressure," Fed Governor Lisa Cook said last month, remarks echoed by ​several colleagues.

The issue is hardly settled.

Evercore ISI Vice Chair Krishna ​Guha sees a loss of worker bargaining power as a reason why the natural unemployment rate will fall as employees become willing to stay in jobs and accept lower wage increases, putting downward pressure on inflation - an argument that reaches conclusions similar to those of Warsh in terms of cutting interest rates but for somewhat different reasons.

But the public comments from Fed officials have painted a more complex picture: jobs under pressure for some workers, new ​productive potential for others, wealth gains fueling consumption in some households, resource constraints during the ‌AI buildout, and high expected investment returns likely to raise underlying interest rates.

"There are lots of forecasts about both the rollout of AI, the effectiveness of AI, the energy efficiency of AI, the labor market ​implications of AI, and the only thing you know for sure is those forecasts are going to be wrong," Richmond Fed President Tom Barkin said last week. "Whether they are going to be too optimistic ​or too pessimistic you'll have to sort out as you go."

(Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci )