Members of the Federal Reserve rate-setting committee are incorporating the effects of increased labor productivity, driven by the adoption of artificial intelligence technology, into their economic forecasts. Fed Chair Jerome Powell discussed this at a December news conference, noting that historically, technological advancements have led to more work and higher incomes. He acknowledged, however, that the outcome of AI's integration remains to be seen.
Economists and investors highlight the potential of generative AI tools to boost worker productivity and alter the labor market landscape. According to research published in the National Bureau of Economic Research, these machine-learning-powered tools could improve as they are increasingly used to complement human labor.
"This is because AI can learn. And human beings can also try to utilize AI more effectively, and train AI to suit each person. And the resulting productivity gain is huge," stated Ping Wang, a Washington University in St. Louis economics professor and co-author of "Artificial Intelligence and Technological Unemployment." Together with Tsz-Nga Wong, a senior economist at the Federal Reserve Bank of Richmond, Wang explored various scenarios for AI's evolution. In one "unbounded growth" scenario, full technological development might lead to a 23% unemployment rate while boosting productivity three to four times.
"Over the next decade, which is more like an intermediate run, labor productivity will increase by about roughly 7% per year," Wang told CNBC, clarifying that this remains a hypothetical scenario.
The potential advancements in AI could affect employment, a key aspect of the Federal Reserve's dual mandate. The Federal Open Market Committee's December projections indicated a long-term federal funds rate near 3%, slightly accommodative compared to a medium-run neutral interest rate of 3.7%, based on Cleveland Fed economists' estimates.
Some investors draw parallels between the current surge in data center construction and the capital expenditure boom in network components from 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, to CNBC.
Watch the video to learn more about how AI affects the Fed's economic outlook.