Members of the Federal Reserve rate-setting committee are considering the implications of increased labor productivity in their economic forecasts as artificial intelligence (AI) technology gains wider adoption.
During his December news conference, Fed Chair Jerome Powell commented on the topic, observing that in past technological advancements, "there's always been more work and higher productivity and incomes have risen. What will happen here? We're going to have to see."
Experts in economics and investment circles believe that generative AI tools, especially, have the potential to boost worker productivity and disrupt the labor market. These tools, driven by machine learning, are expected to improve as more users incorporate them into their workflow, according to researchers from the National Bureau of Economic Research.
"This is because AI can learn. Human beings can also try to utilize AI more effectively, and train AI to suit individual needs. The resulting productivity gain is significant," explained Ping Wang, an economics professor at Washington University in St. Louis and co-author of the study, "Artificial Intelligence and Technological Unemployment."
In collaboration with Tsz-Nga Wong, a senior economist at the Federal Reserve Bank of Richmond, Wang modeled various scenarios for AI evolution. In one "unbounded growth" scenario, where the technology matures fully over several decades, 23% of workers might lose their jobs while labor productivity could increase by as much as three to four times.
"Over the next decade, which is more of an intermediate-term projection, labor productivity is expected to rise by approximately 7% per year," Wang told CNBC, though he acknowledged this is a hypothetical scenario that may not materialize.
These potential outcomes could influence the employment focus of the Federal Reserve's dual mandate. The Federal Open Market Committee in December projected a federal funds rate settling near 3% in the long run. This positioning may be moderately accommodative compared to an estimated medium-run neutral interest rate of 3.7%, according to economists from the Cleveland Fed.
Some investors perceive today's enthusiasm for building data centers as reminiscent of the capital expenditure surge on network components during the 1990s.
"The fact that we see a run-up in valuations makes us a little more cautious about future returns," remarked Dan Tolomay, chief investment officer at Trust Company of the South, in a CNBC interview.
Watch the video to learn more about how AI affects the Fed's economic outlook.