Atlanta Fed President Raphael Bostic recently delivered a thought-provoking message about the future of the U.S. economy.
He suggested that the rapid adoption of Artificial Intelligence (AI) could fundamentally change the labor market, leading to a period of structurally higher unemployment. Crucially, he argued this is a problem that the Federal Reserve cannot solve with its primary tool: interest rate cuts. This perspective forces us to reconsider the path of future monetary policy, especially as recent economic data presents a complex picture.
To grasp Bostic's point, it's important to understand the concept of 'structural unemployment'. Unlike cyclical unemployment, which rises during a recession and falls during an expansion, structural unemployment stems from a deeper mismatch. It occurs when technological shifts, like the AI revolution, eliminate certain jobs while creating new ones that require entirely different skills. Workers who are displaced may not have the training for the new roles, leading to a higher baseline level of joblessness that persists even in a healthy economy.
This creates a major dilemma for the Fed. Recent data has already been sending mixed signals. On one hand, the Bureau of Labor Statistics made a massive downward revision to 2025's job growth numbers, cutting the initial estimate by nearly 70%. This suggests the labor market was significantly weaker than first believed. On the other hand, inflation remains a concern. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, recently re-accelerated and remains well above the 2% target.
Here's the bind: if the rising unemployment is structural (due to AI), then trying to lower it with rate cuts would be ineffective and dangerous. Rate cuts stimulate overall demand, but they don't retrain workers or create a better skills match. Instead, stimulating the economy could simply reignite inflation without fixing the core employment issue. Other factors, like a slowdown in immigration, are also tightening the labor supply, adding another layer of structural pressure. Therefore, Bostic's comments, echoed by other officials like Governor Barr, suggest the bar for rate cuts is now much higher. The Fed may need to tolerate a slightly higher unemployment rate to ensure inflation is truly defeated.
- Terminology -
- Structural Unemployment: Joblessness caused by a fundamental mismatch between the skills workers have and the skills employers need, often due to technological shifts.
- PCE (Personal Consumption Expenditures): The Federal Reserve's preferred measure of inflation, which tracks the prices of a wide range of consumer goods and services.
- Dual Mandate: The twin goals set for the Federal Reserve by Congress: to achieve stable prices (low inflation) and maximum employment.