- Key insight: The Federal Reserve is grappling with how to factor artificial intelligence-related investment and productivity into its monetary policy views.
- Expert quote: "In my judgement, now is the time for society to begin to consider how to address these potential disruptions, while AI adoption is in its relatively early stages so we can realize the long-term benefits for society," — Federal Reserve Gov. Michael Barr
- Forward Look: In the near term, Barr expects the Fed to continue raising interest rates to tamp down on inflation, which has been above the central bank's 2% target for more than five years.
Artificial intelligence has not reshaped the labor market, but at least one central bank official wants the country to be ready in case it does.
Federal Reserve Gov. Michael Barr, in a speech delivered Tuesday afternoon to the Economic Club of Detroit, said he expects AI to provide a long-term boost to the U.S. economy but warned that policymakers should be prepared to deal with "serious short-term disruptions" along the way.
"If AI proves to be capable of work that displaces humans, the extent of the disruption to the labor market will depend in part on whether society undertakes the investments needed in new job creation, worker training, connecting workers to new jobs, and other efforts to mitigate adverse effects for the long term," Barr said. "In my judgement, now is the time for society to begin to consider how to address these potential disruptions, while AI adoption is in its relatively early stages so we can realize the long-term benefits for society."
For now, Barr said, the labor market is on solid footing, adding about 80,000 jobs per month this year, what he described as a "breakeven pace" of hiring that has kept unemployment around 4.1%.
Still, he noted, higher unemployment among younger workers suggests that the technology could be serving as a substitute for entry-level labor in AI-dominated industries, rather than just a complement to it.
"Some tasks that are easily automated with clear guardrails and predictable outcomes might see rapid labor substitution, while other tasks that require human judgment, management, coordination and relationships, creativity, or outputs that are hard to measure might see more labor augmentation," he said. "If labor market changes happen quickly, it will be hard for workers to adjust and dislocations might be large, whereas a more gradual adoption might permit more orderly adjustments."
For now, Barr said increased competition for high-tech components and a surge in data center investment are pushing up inflation, adding a demand-side shock at a time when crimped oil flows and elevated trade barriers are limiting aggregate supply.
In light of these developments and inflation reading remaining above the Fed's 2% target for more than five years, Barr said he supported the Federal Open Market Committee's move to raise interest rates earlier this month. He also reiterated his view that further tightening will be needed to bring down price growth in a timely fashion.
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"In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion," he said. "We want to support sustainable, durable growth in support of maximum employment, and price stability is crucial to that."
Barr has discussed both the potential risks and benefits of AI in public remarks several times in recent years. While the near- and long-term impacts of the technology are clear, he said the "greatest uncertainty that might be relevant to monetary policy decisionmaking" is in the medium term — the next two to five years.
Some proponents of AI say the central bank should be factoring higher productivity into their economic outlook now, a shift that could result in lower inflation readings, thus suggesting that interest rates could be set lower.
On the other hand, Barr noted, higher growth could result in higher return expectations for investors and lower savings rates for households that expect higher lifetime earnings — developments that could indicate a higher neutral rate of interest and, with it, a higher federal funds rate.
Barr said he was open to both interpretations being proven true, but for now he is focused on addressing current economic conditions.
"In my view, it is too early to know if these dynamics are in play right now," Barr said. "What is clear right now is that inflation is too high."
All-of-government approach to fraud
During a question-and-answer session following his prepared remarks, Barr discussed the need to address the frauds and scams — both traditional and those involving crypto.
Barr — noting that some estimates suggest cryptocurrencies were used to facilitate between $600- and $700 million each year — said addressing the issue will require a "whole-of-government and a whole-of-financial-sector effort to make a difference."
"Regulators can do their part by making sure that banks have in place good anti-fraud controls, good cybersecurity controls, good controls over third-party risk management," said Barr, who formerly served as the Fed's vice chair for supervision. "Banks can do their part by educating their customers and their tellers and their employees about the types of scams that are out there. Law enforcement agencies can make sure scammers are a priority for them to go after. Even though each individual amount seems too small for law enforcement to go after, when you add it all up for society, it's really a blot on the financial sector."
Awareness key to Fed independence
Barr was also asked to weigh in on the importance of the Fed's ability to act as an independent agency.
Barr said the Fed officials need to be insulated from political hirings and firings so they can make difficult policy decisions without fear of retribution. He said the ability for the Fed to maintain this independence relies on broader awareness and appreciation of it in Congress and among the general public.
"The more people understand why being independent helps us serve the public, the stronger and more robust and durable our independence is," he said.
