Fed's Cook: AI Triggers Major Changes, May Lead to Rise in Neutral Interest Rates in the Short Term

Odaily News Federal Reserve Governor Cook stated that artificial intelligence has triggered a generational shift in the U.S. labor market and may lead to an increase in unemployment, a situation the Federal Reserve may not be able to address through interest rate cuts. While AI will bring new opportunities, in the early stages, job displacement may precede job creation. Therefore, as the economy transitions, the unemployment rate may rise, and labor force participation may decline. In such a scenario, even with productivity gains, if the potential unemployment rate is pushed higher due to structural factors, any response from the Federal Reserve could risk triggering higher inflation. She also noted that other "profound" challenges facing monetary policy include: the AI investment boom may push up the neutral interest rate in the short term. All else being equal, this could imply a need to tighten monetary policy. However, if the emerging AI economy leads to increased income inequality, or if the benefits of technological progress are concentrated among wealthier groups, the neutral interest rate may decline over time. (Jin10)