[Core Summary]

Federal Reserve Chair Kevin Warsh said on October 16 that artificial intelligence is delivering a structural shock to the US economy, offering both the prospect of a productivity jump and the risk of new uncertainty for inflation and the labor market, and pledged to use monetary policy tools to keep inflation under control.

[Event Details]

  • Warsh’s framing: Warsh described AI as a “shock” to the US economy, comparing its diffusion speed and breadth to historic electrification and internet rollouts but with higher policy uncertainty.
  • Policy pledge: He pledged that the Fed will stay committed to returning inflation to the 2% target, and will not relax its price-stability commitment in exchange for short-term growth.
  • Two-sided effect: Warsh noted that AI could raise productivity and lower unit costs over the medium term, exerting a structural disinflationary effect, while in the short term it could lift demand for data center construction, equipment, and electricity, creating inflationary pressure.
  • Labor market: He warned that AI’s impact on the labor market is highly uneven across sectors and roles: some white-collar jobs face substitution pressure, some technical roles are seeing demand rise, and overall unemployment may stay volatile.
  • Policy toolkit: He hinted that future rate decisions will pay closer attention to how AI changes estimates of potential output and the natural rate of unemployment, and that the Fed may recalibrate its policy framework if needed.

[Panorama]

Warsh’s remarks signal that the Fed has moved from “passive observation” of the AI shock to “active modeling.” Historically, when confronting technological revolutions, the Fed has relied on ex-post data revisions to recalibrate its policy reaction function; AI, with its rapid diffusion, uneven cross-sector penetration, and non-linear effects on the labor market, poses a fundamental challenge to the traditional Phillips curve and to estimates of potential output. The Fed is therefore likely to become the first major central bank to systematically embed AI variables into mainstream macro models and policy reaction functions, setting an example for other central banks.

The deeper tension is the huge uncertainty around AI’s two-sided effect on inflation. On one hand, the AI-driven productivity surge could significantly reduce unit output costs within three to five years, exerting structural disinflationary pressure. On the other hand, the concentrated explosion of demand for electricity, chips, cooling equipment, and data center construction could push up prices for energy, land, and high-end equipment in the short term, creating inflationary pressure. The US inflation path over the coming quarters will therefore depend heavily on the race between the AI investment cycle and the pace of productivity release; whichever runs faster will determine whether inflation goes up or down.

From the perspective of global monetary policy coordination, the Fed’s policy response to the AI shock will profoundly affect the rate cycles and exchange rate trajectories of other major economies. If the Fed chooses to tolerate a higher inflation target in exchange for the AI-driven potential output gain, other major central banks may be forced to adjust their policy frameworks in step to maintain purchasing power and cross-border capital flow stability. Global monetary policy frameworks are therefore entering a new phase of “structural revaluation,” during which policy coordination mechanisms, exchange rate intervention thresholds, and cross-border supervisory cooperation among major central banks may all face systemic updates.

[Multiple Perspectives]

  • Warsh and the Fed: Treat AI as a structural shock that must be actively managed, emphasizing policy framework adjustments and a firm inflation-target pledge to safeguard price stability.
  • The White House and administration: Tend to view AI as a growth opportunity and are cautious about additional monetary tightening; some officials worry that an overly aggressive policy response could stifle innovation and employment.
  • Wall Street: Views are split; some institutions believe AI-driven productivity gains will slow the pace of rate hikes, while others worry inflation stickiness will force the Fed to keep policy restrictive for longer.
  • Academia: Economists remain open-minded about AI’s inflationary effect, with some studies emphasizing the lag in productivity gains and others focusing on near-term price spillovers from electricity and infrastructure demand.
  • Other major central banks: The ECB and the Bank of England are closely tracking the Fed’s exploration of an AI policy framework; several central banks have begun incorporating AI-related variables into their internal forecasting models.

Editor: GoodInfo Global News Desk