Some US Federal Reserve officials have begun suggesting in recent days that productivity growth from artificial intelligence (AI) could mean higher interest rates, a view that would put them at odds with US President Donald Trump’s administration and its nominee to lead the US central bank.
“I expect that the AI boom is unlikely to be a reason for lowering policy rates,” Fed Governor Michael Barr said on Tuesday in remarks prepared for a speech in New York.
Barr’s comments followed remarks from Fed Vice Chair Philip Jefferson, who said in a Feb. 6 speech that “all other things being equal, persistent increases in productivity growth are likely to result in an increase in the neutral rate, at least temporarily.”
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AI and productivity are likely to take on increasing importance this year in debates over interest rates as Trump continues to put pressure on the Fed to reduce borrowing costs.
The central bank cut its benchmark rate three times last year, but held it steady at its policy meeting last month. It is not expected to cut rate before midyear, according to futures traders.
Kevin Warsh, Trump’s nominee to take over as Fed chair when Jerome Powell’s term expires in May, has echoed administration officials in arguing AI could unleash a productivity boom that will allow for non-inflationary growth, and lower rates to accompany it.
In his speech on Tuesday, Barr outlined several reasons why that may not be the case.
“Demand for capital would rise because of the strong business investment required to take advantage of the technology, putting upward pressures on interest rates,” he said. “And household savings could fall due to expectations of stronger real wage growth and thus higher lifetime earnings, also putting upward pressure on interest rates.”
The Fed’s benchmark rate now lies in a range between 3.5 percent and 3.75 percent. Several Fed officials see that as close to neutral for the economy, and have cited that as a reason to slow or stop rate cuts.
San Francisco Fed President Mary Daly, speaking to reporters later on Tuesday after an event in San Jose, California, said an AI-induced acceleration in productivity growth would dictate a higher neutral rate in “the standard model” because “the demand for investment would rise relative to the supply of savings.”
However, the San Francisco Fed chief said any analysis would be far from clear-cut.
“Maybe it raises the neutral rate a little bit,” she said. “We need to be a little humble about what we think the impact on the neutral rate will be.”
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