Members of the Federal Reserve's rate-setting committee are now considering increased labor productivity in their economic projections, a result of the broader adoption of artificial intelligence technologies.
At his December news conference, Fed Chair Jerome Powell discussed this topic, stating that during previous technology waves, "there's always been more work and higher productivity, and incomes have risen. What will happen here? We're going to have to see."
Economists and investors believe that generative AI tools, in particular, have the potential to boost worker productivity and significantly alter the labor market. According to researchers contributing to the National Bureau of Economic Research, these tools, driven by machine learning, may evolve with increased usage as individuals integrate them into their work routines.
"This is because AI can learn. And human beings can also try to utilize 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 colleague, Tsz-Nga Wong, a senior economist at the Federal Reserve Bank of Richmond, have modeled different scenarios for the advancement of AI. In one scenario of "unbounded growth," where the technology becomes fully developed over several decades, 23% of workers could lose their jobs, while labor productivity might increase three to four times.
"Over the next decade, which is more like an intermediate run, labor productivity will increase by about roughly 7% per year," said Wang in an interview with CNBC. He emphasized that this scenario remains hypothetical and may not occur.
The potential outcomes could impact the employment aspect of the Federal Reserve's dual mandate. During the December meeting, the Federal Open Market Committee projected a federal funds rate of approximately 3% in the long run. This rate may be slightly accommodative compared to an estimated medium-term neutral interest rate of 3.7%, according to economists from the Cleveland Fed.
Some investors see parallels between today's surge in data center construction and the capital expenditure boom on network components in the 1990s.
"The fact that we see a run-up 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 the video to learn more about how AI affects the Fed's economic outlook.