Fed races to adapt to AI promises and pitfalls for jobs and inflation

US Federal Reserve officials who have largely accepted that artificial intelligence will lead to dramatic shifts in the economy are now struggling to understand the pace and extent of what's to come, with a divide emerging over its potential to impact the labour market and prices.

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The announcement by tech firm Block on Thursday that it would shed 40% of its workers, roughly 4,000 people, because “something has changed” in how it uses labour due to Al, highlighted the stakes.

Rising layoffs would traditionally lean central bankers towards looser monetary policy. The Al transition, though, has raised a different response, with officials saying higher unemployment rates may be par for the course ahead, with displaced workers taking longer to find new jobs and the higher capital returns and wages for those still working keeping upward pressure on inflation.

“We're in the part of the cycle where this is a positive, real shock, but most of it is in the form of positive real income and very little disinflation,” with stock gains padding some households’ wealth, and massive capital investment straining electricity and building costs in some areas, Adam Posen, president of the Peterson Institute for International Economics, said in a discussion about inflation, estimating US price pressures would build from here. Those seeing Al as a near-term disinflationary force “have got it exactly wrong.”

That group includes Fed chair nominee Kevin Warsh, who feels interest rates should fall in part to account for Al-driven productivity gains holding down inflation.