How AI Is Influencing The Fed’s Calculus

Economic Outlook & AI Impact - The Federal Reserve anticipates rapid GDP growth in 2026, exceeding prior forecasts, potentially influenced by AI and increased productivity [1] - Economists project AI could significantly reshape American work, with concerns about job displacement offset by substantial productivity gains [2] - New technologies, including AI, typically cause initial job losses but ultimately drive productivity increases, potentially leading to a 3-4x rise in labor productivity in the long term [3] - AI adoption follows a J-curve pattern, initially causing efficiency and job growth decline, followed by improvement as AI is effectively utilized [4][5] Labor Market Dynamics - The labor market is experiencing slower growth, with job growth declining throughout the year, partly due to federal worker layoffs and private sector reductions [6][7] - The unemployment rate rose to 4.6% in November, and economists are uncertain about the number of jobs needed to prevent further increases [8] - Current low hiring and low firing rates suggest uncertainty in the market rather than a slowdown [9] Monetary Policy & AI - The Federal Reserve's tools are not designed to directly address technological advancements like AI, focusing instead on cyclical versus secular trends [9][10] - AI may lead to lower wages or employment, and lower interest rates may not easily resolve these issues [15] - There's a risk that workers may become more productive but lose leverage in wage negotiations as businesses adapt to AI [11] Historical Parallels & Investor Behavior - The current AI investment boom resembles the late 1990s, with rising price-to-earnings ratios for tech stocks [12] - The Federal Reserve should be prepared to address the implications of asset bubbles for the broader economy and banking system after they burst [15]