San Francisco Fed President Mary Daly recently tempered the market's enthusiasm about AI's immediate economic impact.
In a recent interview, she acknowledged that U.S. productivity growth is running above historical norms, partly thanks to AI-driven cost savings. However, she emphasized that these gains are not yet 'transformative' enough to alter the Federal Reserve's immediate policy path. This cools the popular market narrative that AI will quickly lead to disinflation and justify pre-emptive interest rate cuts.
The data supports her nuanced view. First, recent figures show nonfarm business productivity at an annual growth rate of about 2.9%, which is nearly double the average from 2007 to 2019. This is certainly a positive development. Second, however, the pace of growth has slowed from previous quarters, and unit labor costs, while moderating, are still rising. This mixed evidence suggests that while AI is helping, it hasn't sparked a full-blown productivity revolution that would vanquish inflation on its own.
This cautious approach is not hers alone; it reflects a growing consensus within the Fed. For instance, Fed Governor Barr and Chicago Fed President Goolsbee have also warned against cutting rates based on anticipated productivity gains. They argue that the optimism surrounding AI could actually boost economic demand and raise the 'neutral interest rate' (r*). If that happens, it would offset some of AI's disinflationary benefits, meaning the Fed would have less, not more, reason to cut rates now.
With April's inflation data coming in hotter than expected, the Fed's priority remains on realized data, not future promises. Daly's comments confirm that the central bank will wait for clear, durable evidence of both higher productivity and sustained lower inflation before considering a policy shift. The message is clear: the Fed will reward results, not hype.
- Glossary
- Unit Labor Costs: The average cost of labor per unit of output. It's a key measure of inflationary pressure from wages.
- Neutral Interest Rate (r*): The theoretical interest rate at which monetary policy is neither expansionary nor contractionary, keeping the economy stable with full employment and stable inflation.
- Disinflation: A slowdown in the rate of price inflation. Prices are still rising, but at a slower pace.