Members of the Federal Reserve’s rate-setting committee are incorporating increased labor productivity into their economic forecasts as the adoption of artificial intelligence (AI) technology accelerates. Chair Jerome Powell highlighted this trend in a December news conference, noting that historical technological advancements have typically led to greater work output, rising productivity, and higher incomes.
Economists and investors are particularly optimistic about the potential of generative AI tools to enhance productivity and disrupt the labor market. Researchers from the National Bureau of Economic Research suggest that AI’s ability to learn and evolve could lead to significant productivity gains as more individuals integrate these tools into their work processes. Ping Wang, an economics professor at Washington University in St. Louis, emphasized that the enhanced collaboration between humans and AI could yield tremendous efficiency benefits.
Wang and co-author Tsz-Nga Wong, a senior economist at the Federal Reserve Bank of Richmond, explored various scenarios regarding AI’s impact on the labor market. In an “unbounded growth” scenario where AI technology matures over decades, they project that 23% of workers could face job losses while labor productivity could soar three to four times. Over the next decade, they estimate an approximate 7% annual increase in productivity, though Wang cautions this remains a hypothetical scenario.
These developments could influence the employment aspects of the Federal Reserve’s dual mandate. In its December meeting, the Federal Open Market Committee forecasted a long-run federal funds rate nearing 3%, a potentially accommodating stance compared to a medium-run neutral interest rate of 3.7%. Investors are cautious about market valuations, recalling the capital expenditures boom of the 1990s related to network components.
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