The Zhitong Finance App learned that from ordinary workers worried about losing their jobs to investors warning of financial bubbles, anxiety caused by artificial intelligence is everywhere. Today, it has begun to dominate discussions within the Federal Reserve. According to the minutes of the Bank of America's latest policy meeting, this technology is extremely prominent when policymakers think about almost any economic issue. In 15 paragraphs dedicated to current conditions and economic prospects, AI was mentioned no less than 18 times.
“The discussion on AI is not only lengthy, but extremely wide-ranging,” said Monetary Policy Analytics economist Derek Tang (Derek Tang). AI is now influencing them from different angles — their inflation predictions, employment predictions, financial stability. It seems to have penetrated every corner.”
The impact of AI on the economy was a topic of debate in the economics community long before ChatGPT was released to the public in 2022. Discussions often revolve around the technology's potential to increase worker and business productivity—that is, to achieve more with the same or less capital and labor. This could translate into higher economic growth without being burdened by higher inflation.
Federal Reserve officials have also been considering this possibility. However, their recent public speeches and minutes of the July meeting show that officials are equally concerned that even if the timing and extent of productivity returns remain highly uncertain, AI may have an impact on the economy that needs to be addressed in the short term.
Dual missions under pressure
The Federal Reserve has two key goals for achieving a healthy economy: price stability and full employment. Despite widespread concerns that AI could cause large-scale unemployment, Federal Reserve officials are increasingly wary of the potential impact of inflation.
In recent years, a series of shocks have boosted price pressure, including tariffs and a sharp rise in oil prices caused by the war between the US and Iran. These factors have caused inflation, which once cooled down after the pandemic, to rise again. Now, with the US inflation rate exceeding the 2% target for more than five years, officials are considering whether AI investment will trigger a new round of price pressure. This has already been reflected in how AI infrastructure construction is driving up the price of chips and software, and in turn, the price of consumer goods such as smartphones.
“Several participants assessed that the impact of AI infrastructure construction on consumer prices has so far been limited to some categories,” the minutes of the conference show. However, several other participants believed that AI investments had a broader impact on prices by boosting aggregate demand, or assessed that this would happen soon.”
The debate touched on the crux that had plagued Federal Reserve officials for months. Some believe that the current inflationary pressure is temporary, which will allow the central bank to keep interest rates unchanged, as price pressure will eventually subside on its own. Others — including three dissenting officials who voted for interest rate hikes last month — think there is evidence of more general inflation.
At the same time, AI is putting conflicting pressure on the labor market. On the one hand, it is destroying some entry-level white-collar jobs and even higher-level computer programming jobs; but on the other hand, data center construction is also causing a shortage of skilled workers in some fields. Dallas Federal Reserve President Lorie Logan (Lorie Logan) spoke about this in western Texas early this summer — data center construction near El Paso is causing shortages of electricians, plumbers, and construction workers.
“Several participants assessed that the net impact of AI-related developments on employment has been limited so far. Some workers have been replaced, while others have benefited from jobs created by AI construction,” the minutes of the conference said.
It's too early
However, many policymakers agree that it is too early to determine whether AI can deliver on its huge economic potential.
Just like in the 90s of the last century, when personal computers and the internet rapidly changed the economy, AI seems to be everywhere, yet it is not yet reflected in productivity data. The biggest optimists, however, include economic officials in the Trump administration and Kevin Warsh (Kevin Warsh), who joined the Federal Reserve in May this year.
“AI will be a major inflationary deterrent, increase productivity and enhance America's competitiveness,” he wrote in a column last year. For every 1 percentage point increase in annual productivity, the standard of living will double within a generation.”
Many of Walsh's colleagues at the Federal Reserve looked forward to this, but at the same time remained cautious.
Financial stability
“Several participants said that AI-related investments could increase productivity and potential output growth in the next few years,” the minutes said. However, these participants also pointed out that there is considerable uncertainty about the timing and scale of potential productivity gains.”
Subsequently, several officials warned that the Federal Reserve should prepare for a scenario where the future of AI falls short. The minutes of the meeting show that this “will lead to a significant revaluation of the stock market, which in turn will have a negative impact on consumer spending.” Officials also warned that drastic changes in market pricing could also put pressure on financial institutions involved in AI-related loans.
“Several participants emphasized that capital expenditure in the AI sector is increasingly being financed through loans, including credit from non-bank investors or regional banks,” the minutes of the conference said.
Not to be overlooked, officials also pointed out at the meeting that AI has created a new level of risk in an area that the Federal Reserve has long been concerned about — cybersecurity. In April of this year, the US Treasury urgently convened a meeting with the heads of major US banks. Then-Federal Reserve Chairman Jerome Powell also attended to discuss the threat posed by new AI tools to cybersecurity.