While AI will provide “new opportunities,” she said, in the early stages “job loss may precede job creation, so the unemployment rate could rise and labor force participation decline as the economy changes.” In that situation, with underlying unemployment being pushed up on a structural basis, the Fed would be unable to respond without risking higher inflation, even as productivity rises.
“In a productivity wave like this, a rise in unemployment may not signal greater slack. As such, our normal demand-side monetary policy may not be able to alleviate AI-induced unemployment without also increasing inflationary pressures,” she said. “Monetary policymakers would face a trade-off between unemployment and inflation. … Education, workforce and other non-monetary policies may be better suited to address these challenges in a more targeted manner.”
One of the other “profound” challenges for monetary policy, Cook said, is the possibility that a boom in AI investment could raise neutral interest rates in the short term — a development that, all things being equal, could imply the need for tighter monetary policy — but then lower them over time if the emerging AI economy leads to greater income inequality, or if profits from the technology become concentrated among the wealthy. Her comments are part of an emerging debate at the Fed about how AI can reshape the economy. While some officials have argued that higher productivity could enable lower interest rates, there are also concerns about the impact on the unemployment rate, and how the continued boom in AI investment could fuel inflation, at least in the short term.
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