Members of the Federal Reserve’s interest rate-setting committee said they are factoring improvements in labor productivity into economic forecasts as artificial intelligence technology becomes more widespread.
Federal Reserve Chairman Jerome Powell addressed the topic at a press conference in December, saying that in past waves of technology, “we’ve always had more jobs, more productivity, and higher incomes. What’s going to happen here? We’ll have to wait and see.”
Economists and investors say generative AI tools in particular have the potential to improve worker productivity and shake up the labor market. These machine learning-powered tools are likely to improve over time as more people use them to enhance their jobs, say researchers writing for the National Bureau of Economic Research.
“That’s because AI can learn. And humans can try to use AI more effectively and train AI to suit each person. And the resulting productivity gains are enormous,” said Ping Wang, economics professor at Washington University in St. Louis and co-author of “Artificial Intelligence and Technological Unemployment.”
Wang and his co-author, Tsinga Wong, a senior economist at the Richmond Fed, modeled various scenarios for the development of AI. In an “unrestricted growth” scenario, where technology is fully developed over many decades, 23% of workers would be unemployed and labor productivity would increase by a factor of 3 to 4.
“Over the next 10 years, like the midterm run, labor productivity will rise by about 7% per year,” Wang said in an interview with CNBC. He noted that this is a hypothetical scenario and may not play out.
Potential consequences could affect the employment side of the Federal Reserve’s dual mandate. The Federal Open Market Committee in December predicted the federal funds rate would settle near 3% over the long term. That could be a moderately accommodative stance compared to the estimated intermediate-term neutral rate of 3.7%, according to Cleveland Fed economists.
Some investors see similarities between today’s data center construction boom and the 1990s boom in capital spending on network components.
“The fact that we’re seeing an increase in valuations makes us a little more cautious about future returns,” Dan Tolomey, chief investment officer at Trust Company of the South, said in an interview with CNBC.
Watch the video to learn more about how AI will impact the Fed’s economic outlook.
