Federal Reserve officials expect artificial intelligence will reshape the US economy, an idea that proponents of the technology in Silicon Valley have plastered on billboards and TV and pushed in public debate as they channel trillions of dollars into data centers and billions into their bank accounts.
But how the region’s new tech boom evolves, and on what timetable, remains a wild card for central bankers responsible for managing inflation and employment in the short term. In a public forum on Monday in San Francisco, Fed Chairman Kevin Warsh will try to understand better the risks and benefits he and his colleagues may have to balance — from the possible large-scale loss of jobs to the promise of rapid economic growth and falling prices.
The forum, the only scheduled public event of the five task forces Warsh established early in his tenure this year to review issues of major importance to the Fed, will take him to the epicenter of an emerging industry he sees as a “hinge point in history,” even as last week’s midterm elections sparked a backlash against rapid data center construction and raised the specter of deepening inequality.
For all of AI’s disinflationary potential, Warsh is convening the discussion while the frenetic AI buildout is having the opposite effect — driving up prices in a way that increasingly concerns many Fed officials, with no clarity for when it may let up and with the possibility the central bank may need to slow the very thing Warsh sees as revolutionary.
More broadly, what seemed a clear proposition of supercharged growth and buoyant productivity when Warsh spoke while auditioning for the Fed job — he was also an investor in AI firms but sold his holdings under Fed ethics rules — is now at the center of a national debate that could change the industry’s trajectory.
Though driven by local politics, the concerns range from local land use to the impact on children’s and societal mental health, the potential for stress in financial markets as capital is channeled through increasingly complex AI funding vehicles, and, most recently, risks to national security after revelations about a top tech industry executive’s relationship with an alleged Chinese spy.
“We have to make sure that AI is used responsibly and ethically,” Oakland Mayor Barbara Lee said recently as she joined a movement to ban local data center construction that has taken root just across San Francisco Bay. “It can’t become a tool that compounds the biases that are already built into our systems. It can’t be a tool for harm, for discrimination, or for displacement.”
Evolving Views
It may be difficult for participants in the three-hour forum on Monday to cover the sweeping set of issues that will determine whether AI deployment accelerates or slows, and therefore how deep an impact it might have on inflation, employment and other data the Fed watches. An agenda published by the San Francisco Fed says the event, including three panels of speakers bookended by comments from Warsh, will offer “input from a wide range of stakeholders on technology’s implications for the economy and the labor market.”
It will be a homecoming of sorts for the Fed chief. He attended nearby Stanford University with some of the tech industry’s leading figures and appointed one of them, Marc Andreessen, to chair the task force that will focus on AI, which Warsh has come to call “super intelligence” in line with President Donald Trump’s wishes.
Other members of the productivity and jobs task force include Chad Jones, a Stanford University economics professor now working with the internal think tank of AI firm Anthropic, which is on the verge of an initial public offering that would value the company at more than $1 trillion, and Asha Sharma, who runs Microsoft’s Xbox business.
Fed officials began focusing on AI even before Warsh took the helm, with the pace of research and discussion accelerating after the release of the ChatGPT generative AI chatbot in 2022 and the start of breathtaking changes for a technology that a decade ago had trouble telling a cat from a kitchen table.
Thanks to breakthroughs in large language models and the massive assemblage of computing power, AI is now solving advanced math and medical problems, turning novice entrepreneurs into software engineers, and offering bespoke “agentic” services that can do legal or scientific research or take over personal bill-paying and daily planning.
While Warsh initially saw AI as providing a downdraft on inflation through higher productivity — a free ride of sorts that could allow central bankers to keep interest rates lower than would otherwise be expected — he has taken a more nuanced view since arriving at the Fed in May. The shift reflects the uncertain timetable for productivity benefits, the potentially inflationary investment needed to realize them, and views about job-market impacts that range from a lift-all-boats boost to a Dickensian world of chronic underemployment.
‘Truly Historic’ Investment
At a forum in Oakland in September, where the city’s mayor issued her warning about AI, Fed Governor Lisa Cook, whose academic research focused on innovation, reiterated concerns that AI would lead to “at least a temporary increase in the unemployment rate” and possibly a jump in the underlying level of joblessness.
Fed Governor Michael Barr raised similar concerns on Thursday, saying the US should prepare for “serious short-term disruptions” to the job market depending on how fast AI is deployed and whether it remains broadly available and affordable to businesses regardless of size.
For the moment, though, AI investments are propping up US growth, stock-market gains, and consumer and business spending that might otherwise be unremarkable.
“You have this investment that is truly historic. You are talking railroad-plus-interstate-highways-historic,” Richmond Fed President Tom Barkin said recently at a chamber of commerce event in South Carolina where attendees pumped him for insight on what the AI boom might mean. “If that historic investment does not pay off and people scale back, you worry what is going to happen.”
Although all the members of the task force Warsh picked are from the tech world, neither they nor the Fed chief will have the last word on how any recommendations find their way into Fed policy.
That matter will be left to officials like Barkin, who said he hoped the discussion on Monday would cover the full landscape of issues.
“I’m hopeful we’ll hear the strongest possible evangelist’s view, as well as the strongest possible other view,” Barkin said. “Then we’ll have a chance to wrestle with it.”
(Reporting by Howard Schneider; editing by Dan Burns and Paul Simao)
