Members of the Federal Reserve's rate-setting committee are now incorporating the impact of heightened labor productivity, driven by the growing adoption of artificial intelligence (AI), into their economic forecasts.
During his December press conference, Fed Chair Jerome Powell remarked that historically, surges in technology have led to increased work and productivity, along with rising incomes. He stated, "What will happen here? We're going to have to see."
Economists and investors are pointing to generative AI tools, powered by machine learning, as potentially significant drivers of worker productivity and potential disruptors of the labor market. According to a study from the National Bureau of Economic Research, these tools can continuously improve as user engagement increases, enhancing their productivity benefits.
"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," explained Ping Wang, an economics professor at Washington University in St. Louis and co-author of "Artificial Intelligence and Technological Unemployment."
Wang and Tsz-Nga Wong, a senior economist at the Federal Reserve Bank of Richmond, have modeled the potential paths of AI's progression. In a scenario of "unbounded growth," where AI fully develops over multiple decades, approximately 23% of workers could find their jobs obsolete, 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," Wang shared in a CNBC interview, noting that such projections remain hypothetical.
The anticipated changes could affect the employment aspect of the Federal Reserve's dual mandate. In December, the Federal Open Market Committee projected a federal funds rate stabilizing around 3% over the long term, potentially a slightly accommodative posture compared to an estimated 3.7% medium-run neutral interest rate, as outlined by Cleveland Fed economists.
Some investors are drawing parallels between the current rush for data center development and the capital expenditures boom on network components seen in the 1990s. "The fact that we see a run up in valuations makes us a little more cautious about future returns," noted Dan Tolomay, chief investment officer at Trust Company of the South, during a CNBC discussion.
Watch the video to learn more about how AI affects the Fed's economic outlook.