Members of the Federal Reserve's interest rate committee say they are factoring increased labor productivity into their economic forecasts as artificial intelligence technology becomes more widespread.
Fed Chairman Jerome Powell addressed this issue in his December press conference, saying that in past waves of technology, “there has been more work and more productivity and incomes have gone up. What's going to happen here? We'll have to see.”
Economists and investors say generative AI tools in particular have the potential to boost labor productivity and shake up the job market. According to researchers at the National Bureau of Economic Research, these machine learning-based tools could improve over time as more people use them to augment their work.
“That's because AI can learn. And people can also try to use AI more effectively and train AI to suit each person. And the resulting productivity gain is huge,” said 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, modeled various scenarios for the development of AI. In a “limitless growth” scenario, where technology is fully developed over many decades, 23% of workers lose their jobs and labor productivity increases three to four times.
“Over the next decade, which is more like an interim period, labor productivity will increase by about 7% per year,” Wang said in an interview with CNBC. He noted that this is a hypothetical scenario that may not come to pass.
The potential impact could impact the employment side of the Federal Reserve's dual mandate. The Federal Open Market Committee forecast in December that the key interest rate would settle at around 3% in the longer term. According to economists at the Cleveland Fed, this could be a moderately accommodative stance compared to an estimated medium-term neutral rate of 3.7%.
Some investors see similarities between today's rush to build data centers and a network component investment boom in the 1990s.
“The fact that we're seeing an increase in valuations makes us a little more cautious about future returns,” said Dan Tolomay, chief investment officer at Trust Company of the South, in an interview with CNBC.
Watch them video to learn more about how AI impacts the Fed's economic outlook.