Fed officials warn AI's economic costs may arrive faster than benefits

Don't count on AI to solve America's inflation problem: That's the message from several Federal Reserve officials who warn that the promise of an AI-fueled productivity boom might not justify cheaper money. Why it matters: How AI shapes inflation and productivity will be a defining question for the Fed under the leadership of Kevin Warsh, who has staked out a case that the technology's supply-side benefits justify keeping rates low . Some Fed officials say they see clearer evidence of AI-related investment boosting demand for labor, equipment and infrastructure than they do of widespread productivity gains. The upshot: Inflation risks look more immediate than any AI-related productivity benefits, especially as inflation remains stubbornly above the Fed's target. What they're saying: "I believe it would be risky to rely on the prospect of higher productivity growth in the future to solve our inflation problem today," St. Louis Fed president Alberto Musalem said in a speech last week . "AI shows great promise as a transformative technology, but the risks of a miscalculation about its impact on productivity and inflation are too great," Musalem said. "[A]t present, I believe we should keep our guard up against persistent above-target inflation today, rather than base monetary policy on the hope that we will have higher productivity growth tomorrow." The big picture: Warsh has argued that AI will be a "significant disinflationary force, increasing productivity and bolstering American competitiveness," as he wrote in a Wall Street Journal op-ed late last year . The theory is that if AI helps workers and businesses produce more with the same resources, the economy can grow faster without generating inflation, giving the Fed more room to lower interest rates. But policymakers want evidence that the productivity gains are here to stay. By the numbers: Productivity started to take off before most companies had adopted AI, making it difficult to...

Original source: Axios