Is AI a new variable in Fed policy? Fed governor warns that delays have begun to drag on job growth.

The impact of artificial intelligence on the economy is becoming a new variable facing Federal Reserve monetary policy. Federal Reserve Governor Michael Barr warned that the rapid development of AI technology may have begun to exert a substantive impact on the job market, and this change could alter the way the central bank formulates policy.

Speaking Wednesday at the Singapore FinTech Festival, Barr pointed out that a survey by the New York Fed shows AI has prompted employers to cut back on hiring plans, a phenomenon that may be dragging down the rate of employment growth. Federal Reserve officials opted for rate cuts at the past two policy meetings after the job market showed a clear slowdown in the summer.

At the same time, Barr emphasized that trillions of dollars in capital investment flowing into data centers may bring significant economic changes, including increased productivity. He stated that if these changes are significant enough, they will affect the implementation of monetary policy.

Currently, Fed officials are divided on whether a third rate cut is needed in December, but according to the futures markets, investors are betting the central bank will continue to cut rates.

AI's Impact on Employment

Barr cited New York Fed survey data and noted that AI technology has begun to have a substantive impact on corporate hiring decisions. Employers are cutting back on recruiting plans, and the Fed 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 in his speech, indicating that the central bank is maintaining a cautious attitude while assessing the impact of AI.

In his speech, Barr outlined two basic scenarios that generative AI might bring. In the first scenario, AI technology will enhance the functions of existing tasks and positions. The second scenario is more transformative, with work and leisure methods undergoing fundamental changes, efficiency significantly increasing, and companies adopting entirely new business models.

"It is currently hard to predict which scenario (or some intermediate scenario) will become reality," Barr said. This uncertainty adds new complexity to the Fed's policy making.

Capital Investment May Drive Long-Term Productivity Growth

Barr pointed out that the trillions of dollars planned for data center construction could lead to significant economic changes, particularly in terms of productivity improvements. Barr stated:

"Capital investment typically increases labor productivity and can achieve higher output growth in the long run 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 Fed is closely monitoring the potential impact of the AI-driven investment boom on the economy’s potential growth rate and the natural rate of interest.

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