Members of the Federal Reserve's rate-setting committee are taking into account increased labor productivity in their economic forecasts, driven by the broader adoption of artificial intelligence technology.
During his December news conference, Fed Chair Jerome Powell discussed the matter, acknowledging that past technological advancements have consistently led to more work and higher productivity, consequently boosting incomes. "What will happen here? We're going to have to see," he added.
Economists and investors are optimistic about the potential for generative AI tools to enhance worker productivity and transform the labor market. As these machine-learning-powered tools are utilized more extensively, they are likely to improve, based on research from the National Bureau of Economic Research.
"AI has the capacity to learn. Similarly, humans can employ AI more efficiently and train it to meet individual needs, resulting in substantial productivity increases," explained Ping Wang, an economics professor at Washington University in St. Louis, and co-author of "Artificial Intelligence and Technological Unemployment."
Wang and his co-author, Tsz-Nga Wong, a senior economist at the Federal Reserve Bank of Richmond, have modeled various scenarios for AI's evolution. In a scenario of "unbounded growth," where technology fully develops over several decades, 23% of workers could lose their jobs, while labor productivity might increase by three to four times.
Wang mentioned in a CNBC interview that over the next decade, in what they describe as an intermediate run, labor productivity could rise by approximately 7% annually, though he stressed that this scenario is speculative and may not occur.
Such potential outcomes could impact the employment aspect of the Federal Reserve's dual mandate. The Federal Open Market Committee projected a federal funds rate settling near 3% over the long term in December. This stance may be slightly accommodative compared to the estimated medium-run neutral interest rate of 3.7%, as projected by Cleveland Fed economists.
Some investors find parallels between the current surge in building data centers and the capital expenditure boom on network components experienced in the 1990s.
"The rise in valuations prompts us to be a bit more vigilant about future returns," stated Dan Tolomay, Chief Investment Officer at Trust Company of the South, during a CNBC interview.
Watch the video to learn more about AI’s influence on the Fed's economic outlook.