(Yahoo! Finance) - Federal Reserve governor Michael Barr said Tuesday that the boom in artificial intelligence "is unlikely to be a reason for lowering policy rates," disputing the idea of AI as a productivity accelerator that puts the Fed on a rate-cutting path.
While he believes the impact of AI will likely be "profoundly positive" in the long run, it may deeply disrupt the job market in the short term and harm some workers.
Barr also warned that AI could be inflationary, offering the example of electricity supply constraints on the power grid colliding with booming energy demand from data centers.
"For all of these reasons, I expect that the AI boom is unlikely to be a reason for lowering policy rates," Barr said in a speech at the New York Association for Business Economics.
The comments strike a starkly different tone from what Fed Chair nominee Kevin Warsh has said about AI, namely that the technology will usher in "the most productivity-enhancing wave of our lifetimes" and be "structurally disinflationary," allowing for lower interest rates.
Another voice for holding rates steady
Barr sounded equally hawkish on the more conventional measure of inflation and job market health
"I would like to see evidence that goods price inflation is sustainably retreating before considering reducing the policy rate further, provided labor market conditions remain stable," he said.
"Based on current conditions and the data in hand," he added, "it will likely be appropriate to hold rates steady for some time as we assess incoming data."
Barr joins a chorus of Fed officials in recent days who have said they want to see inflation slow before looking at cutting rates. Chicago Fed president Austan Goolsbee told Yahoo Finance on Friday that he would also like to see further progress on inflation falling to the Federal Reserve's 2% target before supporting another rate cut.
A reading of the Consumer Price Index for January, released Feb. 13, showed prices rose 2.4% over the prior year. On a "core" basis, which excludes food and energy, prices rose 2.5% over the prior year.
This Friday, the Commerce Department will release the Fed's preferred inflation gauge — the Personal Consumption Expenditures Index — which economists expect to rise 2.9% in December on a core basis. That would compare with 2.8% in November.
Barr said he believes inflation remains elevated at 3% based on PCE, as tariffs have pushed up goods prices. Looking ahead, he said it's "reasonable" to anticipate that the impact of tariffs on inflation will begin to lift later this year, but cautioned that there are "many reasons to be concerned that inflation will remain elevated."
"I see the risk of persistent inflation above our 2% target as significant, which means we need to remain vigilant," Barr said.
AI and the job market
Barr said that with job creation near zero over the past year, coupled with a low firing rate, there's a "delicate balance" making the job market vulnerable to negative shocks.
Barr also warned that while he believes the impact of AI will likely be "profoundly positive" in the long run, in the short term, AI may deeply disrupt the job market and harm some workers.
He said AI could impact the job market in a couple of different ways. On one hand, it could lead to strong productivity growth while avoiding widespread job losses amid more gradual adoption.
Under another scenario, Barr sees rapid adoption ushering in a "jobless boom." In that scenario, AI agents could replace or displace a range of professional and service occupations. Autonomous vehicles and robotics could automate many manufacturing and transportation jobs, with labor increasingly concentrated in a few manual or highly skilled trades.
"The extent of disruption will depend in part on whether society undertakes the investments needed in new job creation, worker training, connecting workers to new jobs, and other efforts to mitigate adverse labor market effects," Barr said.
Daly: Be forward-looking
Meanwhile, San Francisco Fed president Mary Daly invoked former Fed Chair Alan Greenspan in a speech on Tuesday in San Jose, Calif. She said Greenspan looked past official data in the 1990s, which hadn't yet incorporated higher productivity from technological advances, and held rates steady rather than raising them.
Daly suggested that perhaps the Fed should do the same with AI.
"It is a reminder that monetary policy is a forward-looking business," Daly said.
"We won't find all the answers in the aggregate data on productivity, the labor market, or inflation," she said. "Seeing developments before they fully emerge requires digging deeper, relying on disaggregated information that foreshadows transformation."
Daly stressed that Greenspan's innovation wasn't looking at more data; it was looking at the right data —finding inconsistencies in what he saw and working to resolve them.
By Jennifer Schonberger - Senior Reporter
