Is AI a new variable in the Federal Reserve's policy? Federal Reserve officials warn that it has begun to drag down job growth
Artificial intelligence is reshaping the U.S. job market and monetary policy. Federal Reserve Governor Barr warned that AI has prompted companies to reduce hiring, potentially becoming a new main cause of employment slowdown. Trillions of dollars in capital are flowing into data centers, expected to significantly enhance productivity and bring unprecedented changes and challenges to the economy and policy-making
The impact of artificial intelligence on the economy is becoming a new variable facing the Federal Reserve's monetary policy. Federal Reserve Governor Michael Barr warned that the rapid development of AI technology may have begun to have a substantial impact on the labor market, a change that could alter the way central banks formulate policies.
During a speech at the Singapore FinTech Festival on Wednesday, Barr pointed out that a survey by the New York Fed shows that AI has prompted employers to reduce hiring plans, a phenomenon that may be dragging down the pace of job growth. Federal Reserve officials have chosen to cut interest rates in the last two policy meetings, following a noticeable slowdown in the summer labor market.
At the same time, Barr emphasized that the trillions of dollars flowing into data center capital investments could bring about significant economic changes, including productivity improvements. He stated that if these changes are significant enough, they will affect the implementation of monetary policy.
Currently, Federal Reserve officials have differing views on whether a third rate cut is needed in December, but futures markets indicate that investors are betting the central bank will continue to cut rates.
AI's Impact on Employment
Barr cited survey data from the New York Fed, indicating that AI technology has begun to have a substantial impact on corporate hiring decisions. Employers are reducing hiring plans, and this Federal Reserve governor believes this trend may be one of the reasons for the slowdown in job growth.
However, Barr did not comment on the near-term outlook for monetary policy during his speech, reflecting the central bank's cautious stance in assessing the impact of AI.
Barr outlined two basic scenarios that generative AI may bring. In the first scenario, AI technology will enhance existing tasks and job functions. The second scenario is more transformative, fundamentally changing the way work and leisure are conducted, significantly improving efficiency, and leading companies to adopt entirely new business models.
"It is currently difficult to predict which scenario (or some intermediate scenario) will become a reality," Barr stated. This uncertainty adds new complexity to the Federal Reserve's policy-making.
Capital Investment May Drive Long-Term Productivity Growth
Barr pointed out that the trillions of dollars planned for investment in data center construction could bring about significant economic changes, particularly in terms of productivity improvements. Barr stated:
"Capital investment typically raises labor productivity and has the potential to achieve higher output growth in the long term without putting pressure on inflation."
He emphasized that if these changes are significant enough, they will also affect the way monetary policy is implemented. This statement indicates that the Federal Reserve is closely monitoring the potential impact of the AI-driven investment boom on the economy's potential growth rate and natural interest rate levels
