U.S. Federal Reserve officials broadly agree that artificial intelligence will reshape the economy. What remains unclear is how quickly those changes will unfold and how deeply AI will affect jobs and inflation. A growing divide is emerging inside the Fed over whether AI will ultimately cool price pressures or create new inflation risks.
The debate intensified after tech company Block announced plans to cut roughly 40% of its workforce, or about 4,000 employees, citing a fundamental shift in how it uses labor due to AI. The move underscored how rapidly automation may transform corporate structures and employment patterns.
Traditionally, rising layoffs would push central bankers toward looser monetary policy. However, the AI transition complicates that response. Some policymakers argue that higher unemployment could become a structural feature of the economy, as displaced workers take longer to find new roles. At the same time, increased returns on capital and higher wages for highly skilled workers may keep upward pressure on inflation.
Adam Posen, president of the Peterson Institute for International Economics, warned that AI may not deliver the near-term disinflation many expect. He described the current phase as a positive real shock, largely boosting incomes and asset values rather than lowering prices. Strong stock market gains and heavy capital investment — particularly in electricity and infrastructure — could add to inflationary pressures instead of easing them.
Is AI a disinflationary force?
Fed chair nominee Kevin Warsh has taken a more optimistic stance. He argues that AI-driven productivity gains could act as a powerful disinflationary force, supporting lower interest rates. In a Wall Street Journal opinion piece, Warsh described AI as a tool that increases efficiency and strengthens U.S. competitiveness, potentially allowing the Federal Reserve to ease policy without reigniting inflation.
However, many Fed policymakers remain cautious. They question how quickly AI will translate into widespread staffing changes and whether history will repeat itself — with new technologies displacing jobs in the short term but creating more employment opportunities over time.
Recent market volatility reflects this uncertainty. A research note from Citrini Research warning of a potential “jobs apocalypse” briefly triggered a notable stock market selloff. Investors appear unsettled by the possibility that AI could disrupt white-collar professions such as coding and data analysis, not just traditional manufacturing roles.
Block CEO Jack Dorsey highlighted this shift, stating that AI tools combined with smaller, flatter teams are enabling a new way of operating companies. While AI assistants may improve productivity, they also fundamentally change how businesses are structured and how work is performed.
Research supports the view that AI will affect a broad range of occupations. A 2024 Brookings Institution study found that more than 30% of U.S. workers could see at least half of their job tasks disrupted by AI. That percentage is likely increasing as adoption accelerates.
The Fed’s policy challenge
The Federal Reserve is working to better understand these developments. Mentions of AI, machine learning and related topics in Fed research papers and speeches have surged since the release of ChatGPT in late 2022. Internal discussions now regularly address how AI-driven productivity gains might influence monetary policy.
Despite acknowledging signs of rising productivity, most policymakers are not ready to attribute those gains solely to AI. Some point to more traditional efficiency improvements that emerged during pandemic-era labor shortages.
A key concern is whether AI could lead to structurally higher unemployment. The Fed’s long-term framework assumes a “natural” unemployment rate of around 4.2%, below which inflation tends to accelerate. If AI increases productivity while simultaneously displacing workers, unemployment could rise without necessarily signaling economic weakness.
Fed Governor Lisa Cook recently noted that in a productivity boom, higher unemployment does not automatically imply slack in the economy. Lowering interest rates to offset AI-related job losses could risk fueling additional inflation.
Not all economists agree. Evercore ISI Vice Chair Krishna Guha suggests that AI may weaken worker bargaining power, potentially lowering wage growth and reducing inflation pressures. Under that scenario, the natural unemployment rate could fall, strengthening the case for rate cuts.
For now, the outlook remains uncertain. Fed officials see a complex mix of forces: job displacement for some workers, new opportunities for others, rising household wealth supporting consumption, infrastructure bottlenecks during the AI buildout, and high expected investment returns pushing underlying interest rates higher.
Richmond Fed President Tom Barkin summarized the situation bluntly, noting that forecasts about AI’s rollout, effectiveness, energy demands and labor market effects are highly uncertain. Whether expectations prove too optimistic or too pessimistic will only become clear over time.
Artificial intelligence is reshaping the economic landscape. The Federal Reserve must now decide whether AI will ultimately ease inflation or create new structural pressures — a decision that could shape interest rate policy in the years ahead.
