Federal Reserve governor Michael Barr said Tuesday that the boom in artificial intelligence “is unlikely to be a reason for lowering policy rates,” disputing the idea of AI as a productivity accelerator that puts the Fed on a rate-cutting path.
While he believes the impact of AI will likely be “profoundly positive” in the long run, it may deeply disrupt the job market in the short term and harm some workers.
Barr also warned that AI could be inflationary, offering the example of electricity supply constraints on the power grid colliding with booming energy demand from data centers.
“For all of these reasons, I expect that the AI boom is unlikely to be a reason for lowering policy rates,” Barr said in a speech at the New York Association for Business Economics.
The comments strike a starkly different tone from what Fed Chair nominee Kevin Warsh has said about AI, namely that the technology will usher in “the most productivity-enhancing wave of our lifetimes” and be “structurally disinflationary,” allowing for lower interest rates.
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Barr sounded equally hawkish on the more conventional measure of inflation and job market health
“I would like to see evidence that goods price inflation is sustainably retreating before considering reducing the policy rate further, provided labor market conditions remain stable,” he said.
“Based on current conditions and the data in hand,” he added, “it will likely be appropriate to hold rates steady for some time as we assess incoming data.”
Barr joins a chorus of Fed officials in recent days who have said they want to see inflation slow before looking at cutting rates. Chicago Fed president Austan Goolsbee told Yahoo Finance on Friday that he would also like to see further progress on inflation falling to the Federal Reserve’s 2% target before supporting another rate cut.
A reading of the Consumer Price Index for January, released Feb. 13, showed prices rose 2.4% over the prior year. On a “core” basis, which excludes food and energy, prices rose 2.5% over the prior year.
This Friday, the Commerce Department will release the Fed’s preferred inflation gauge — the Personal Consumption Expenditures Index — which economists expect to rise 2.9% in December on a core basis. That would compare with 2.8% in November.
Barr said he believes inflation remains elevated at 3% based on PCE, as tariffs have pushed up goods prices. Looking ahead, he said it’s “reasonable” to anticipate that the impact of tariffs on inflation will begin to lift later this year, but cautioned that there are “many reasons to be concerned that inflation will remain elevated.”