Fed Chair pick Kevin Warsh in December suggested that business adoption of artificial intelligence would usher “in the most productivity-enhancing wave of our lifetimes.”
But a key Fed official said Tuesday that advances in AI are unlikely to push down interest rates in the short term. That’s in stark contrast to Fed Chair nominee Kevin Warsh’s plan for slashing borrowing costs.
“I expect that the AI boom is unlikely to be a reason for lowering policy rates,” Fed Governor Michael Barr said in prepared remarks during an event in New York.
In December, Warsh, whom President Donald Trump named last month as his pick to head the central bank after Fed Chair Jerome Powell’s term ends in May, made his remarks about the future of AI in the economy.
The Fed should take the same leap of faith that they did with the internet under Fed Chair Alan Greenspan and lean toward cheaper borrowing costs, Warsh said.
CNN reported that Barr’s latest remarks show there’s already some disagreement brewing within the Fed’s powerful 12-person rate-setting committee on how AI could change the world’s biggest economy.
AI Could Have ‘Transformative Effect’
That’s important because Fed officials each have only one vote, including the chair, when they meet eight times a year to set interest rates. That means Warsh would need to get his colleagues on board with lowering rates, CNN said.
In his speech, CNN reported that Barr outlined various ways the technology could affect hiring, productivity and wages, saying he expects AI “will have a transformative effect on the economy” overall.
The most likely impact of AI on the economy is that “some occupations are displaced while new ones emerge, as AI is increasingly integrated into many existing roles,” Barr said.
“But AI adoption occurs gradually enough that large and widespread joblessness is avoided,” he added. Still, it’s possible that “there might be serious short-term disruptions in the labor market,” which should be addressed by society as a whole, including Congress, rather than just the Fed itself, Barr said.
CNN said that overall, AI has become a salient economic issue for central bankers around the world. In addition to Barr, several Fed other officials, including current chair Powell, have said the technology likely will have wide-ranging effects on the US economy. But, the extent and timing of those effects remains to be seen.
In his December interview, Warsh said AI could prove to be “structurally disinflationary,” suggesting the Fed may have a clear path to continue lowering rates, CNN said.
In response to a question posed by CNN, Barr refuted that view, saying it is “very hard to say that productivity would be disinflationary.”
He said that stronger productivity, boosted by AI, could push up the so-called neutral rate of interest, a theoretical level of borrowing costs that neither stimulates nor weakens economic activity.
A Higher Neutral Rate
“There’s more demand for business investment, the savings rate falls because people are anticipating longer lifetime earnings, and so all of that would suggest” a higher neutral rate, Barr said.
According to CNN, a higher neutral rate implies that the economy can withstand higher interest rates, meaning it does not warrant the big rate cuts the Trump administration wants. Barr isn’t the only Fed official with that view, CNN said.
Cleveland Fed President Beth Hammack, who votes on policy moves this year, said in a December interview with the Wall Street Journal, that the neutral rate “could be more upward biased, if (AI) is having more material productivity impact.”
“Technology has always been a disinflationary force in the ecosystem, but it’s still early to be gauging when productivity gains from AI will fully transpire,” said Michael Hans, Chief Investment Officer at Citizens Private Wealth.
