- Key takeaway: Federal Reserve Vice Chair Philip Jefferson highlighted the potential for artificial intelligence to boost worker productivity, which could raise the neutral interest rate above what it might otherwise have been, suggesting that the central bank may have to keep rates higher going forward.
- Expert quote: "All other things being equal, persistent increases in productivity growth are likely to result in an increase in the neutral rate, at least temporarily." — Federal Reserve Vice Chair Philip Jefferson.
- Forward look: Jefferson's comments come as the White House has been pressuring the central bank to lower interest rates, and joins other members of the board in raising concerns about inflation in recent days.
Federal Reserve Vice Chair Philip Jefferson said Friday that, while the central bank's near-term monetary policy choices will be based on incoming data, forthcoming productivity gains brought on by artificial intelligence could compel the Fed to maintain higher interest rates in the future.
Speaking at a conference held at the Brookings Institution Friday focused on supply-side economics and their effect on inflation, Jefferson said that inflation remains stubbornly above the Fed's 2% target, though productivity gains could help reduce inflation in the near-term.
"Progress on disinflation has stalled over the past year, and inflation remains elevated relative to our 2 percent target," Jefferson said. "Certainly, some upside risks remain, but I expect the disinflationary process to resume this year once increased tariffs pass through more fully to prices. In addition, projected strong productivity growth may be a source of further help in bringing inflation down to our 2 percent target."
Jefferson added that the Fed's rate reductions over the past 18 months have brought the federal funds rate into balance and that the current monetary policy stance should result in inflation measures coming back down to 2%.
But how AI translates into productivity and how that productivity translates into inflation remains uncertain, Jefferson said. The potential for AI to reduce the time workers spend doing mundane tasks is understandable, Jefferson said, but not certain in their timing and magnitude. The economic boost from capital expenditures related to building AI data centers, however, is real and happening now, and could compel the Fed to keep rates higher to keep prices stable.
"Even if AI ultimately succeeds in greatly enhancing the productive capacity of the economy, a more immediate increase in demand associated with AI-related activity could raise inflation temporarily, absent offsetting monetary policy actions," Jefferson said. "That said, it is too soon to say if productivity effects from these policies have begun to materialize and what their net effect will be."
Jefferson said that, stepping into this uncertain environment, it is worth considering what the Fed's monetary policy powers can achieve. If the Fed is committed to maintaining price stability as the effects of AI on productivity make their way through the economy, then there is a better chance that those effects will not be inflationary. But if the central bank is not prepared to address the potential inflationary pressure of AI productivity gains, it could find itself playing from behind.
"While changes to aggregate supply are usually driven by broader economic forces, monetary policy plays a pivotal role in regulating the level of aggregate demand. Consequently, prudent policy that maintains balance in supply and demand conditions can influence whether improvements in productivity translate into inflationary or disinflationary pressures," Jefferson said. "Whether monetary policy is stimulating or restraining aggregate demand depends on the position of short-term real interest rates vis-a-vis the neutral rate, which reflects the underlying balance of saving and investment in the economy. All other things being equal, persistent increases in productivity growth are likely to result in an increase in the neutral rate, at least temporarily."
Jefferson's comments come as Fed Gov. Lisa Cook this week
Jefferson was asked during a question-and-answer portion of his appearance about his plans to remain on the Fed board. Fed Chair Jerome Powell, who has been the target of President Trump's ire for years, recently confirmed that he is the subject of a Justice Department investigation into his Congressional testimony concerning ongoing renovations at the Fed headquarters. Trump also moved to fire Fed Gov. Lisa Cook last August over allegations of mortgage impropriety, spurring a lawsuit that is currently being considered by the Supreme Court. Jefferson, whose term on the board expires in 2036, was mum about his future plans.
"I am completely focused on the job that I have," Jefferson said. "That's what I spend my time thinking about every day — doing the best job that I can and [fulfilling] the dual mandate that's been given to us by Congress. Beyond that, I don't have any other focus."
