Members of the Federal Reserve's rate-setting committee are incorporating potential increases in labor productivity due to the broader adoption of artificial intelligence (AI) technology in their economic forecasts.
During his December news conference, Fed Chair Jerome Powell discussed this issue, noting that previous technological advancements have consistently led to more work, higher productivity, and increased incomes. "What will happen here? We're going to have to see," he said.
Economists and investors suggest that generative AI tools, in particular, have the capacity to enhance worker productivity and transform the labor market. Researchers from the National Bureau of Economic Research argue that these tools, driven by machine learning, can improve progressively as they gain wider use to support work tasks.
"This is because AI can learn. Humans can also strive to utilize AI more effectively and tailor AI to meet individual needs. The productivity gain from this is substantial," stated Ping Wang, a professor of economics 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, explored different scenarios for AI's evolution.
In an "unbounded growth" scenario, where technology achieves full development over several decades, 23% of workers could lose jobs, while labor productivity might increase by as much as three to four times.
"During the next decade, which is more like an intermediate run, labor productivity may rise by roughly 7% annually," Wang mentioned in an interview with CNBC, emphasizing that this scenario remains hypothetical and may not materialize.
The prospective impacts may affect employment, a key element of the Federal Reserve's dual mandate. In December, the Federal Open Market Committee projected a federal funds rate of approximately 3% in the long term, which may be slightly accommodative compared to an estimated medium-run neutral interest rate of 3.7%, per Cleveland Fed economists.
Some investors observe parallels between the current surge to construct data centers and the capital expenditure boom on network components seen in the 1990s.
"The fact that we see a run-up in valuations makes us a bit more cautious about future returns," commented Dan Tolomay, chief investment officer at Trust Company of the South, in a conversation with CNBC.
Watch the video to learn more about how AI affects the Fed's economic outlook.