Citigroup: AI spurs a new paradigm of "jobless prosperity," which may force the Fed to cut rates further.

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Citi believes that AI is giving rise to a phenomenon of "jobless prosperity," which may force the Federal Reserve to continue cutting interest rates in the coming months.

According to “Chasing the Wind Trading Desk,” Citi stated in its November 6 report that under the impact of AI, economic growth and employment are becoming decoupled: AI applications are driving productivity gains, but at the same time suppressing companies' willingness to hire, resulting in weak employment data; weak employment and moderate inflation data will provide room for the Federal Reserve to continue cutting interest rates; and rate cuts will in turn stimulate companies to increase AI capital expenditures, forming a positive feedback loop.

The Positive Feedback Mechanism of "Jobless Prosperity"

Citi's global macro strategy team stated that AI is creating a positive feedback mechanism for "jobless prosperity."

The core logic of this loop is: AI applications boost productivity → companies reduce hiring demand → employment data weakens → the Fed cuts rates → companies obtain lower financing costs → further increase AI capital expenditures → productivity is further improved.

This cycle breaks the traditional economic pattern in which employment and growth move in sync, creating a new paradigm of "growth without job creation."

Analysts said that for investors, a weak job market no longer necessarily signals an economic recession; on the contrary, it may become a byproduct of productivity improvements in the AI era.

Weak employment and moderate inflation data will provide the Federal Reserve with room to continue cutting interest rates, and rate cuts will in turn stimulate companies to increase AI capital expenditures, forming a positive feedback loop.

Interest Rate Cut Trajectory May Exceed Expectations

Citi emphasized that in the new AI-driven economic paradigm, monetary easing and robust economic growth can coexist, and the return cycle for technology investments may be longer and more stable than before.

Although Fed Chairman Powell stated after last week's rate cut that a December rate cut is “far from” a foregone conclusion, the team of Citi economist Andrew Hollenhorst believes that weak employment data and moderate inflation data will drive the Fed to continue cutting rates in December, January, and March.

Analysts emphasized that if the US government can reopen in the near term, the Fed may need to consider the combined impact of three employment reports. This judgment is different from mainstream market expectations, implying that the rate cut cycle may be longer and more forceful than expected.

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