Federal Reserve Governor warns: Monetary policy may not be able to address the unemployment wave caused by AI

Federal Reserve Governor Lisa Cook warned on Tuesday that the restructuring of the labor market driven by artificial intelligence (AI) could put monetary policy in a dilemma—lowering interest rates may not effectively address structural unemployment and could potentially raise inflation. This assessment marks a deepening discussion within the Federal Reserve about the economic impact of AI.

In her speech at the National Association for Business Economics annual policy conference, Cook stated, "We seem to be approaching the most profound employment restructuring in generations," and during the transitional phase of economic transformation, "job displacement may occur before job creation, leading to a potential rise in the unemployment rate and a possible decline in labor force participation."

Cook believes that AI has triggered a generational shift in the U.S. labor market and may lead to an increase in the unemployment rate, which the Federal Reserve may not be able to address through interest rate cuts. She warned:

"In this period of productivity boom, a rising unemployment rate does not necessarily indicate that the economy has more idle capacity. Therefore, our conventional demand-side monetary policy may not be effective in addressing the unemployment issues caused by AI without triggering upward inflationary pressures."

Cook's remarks came at a sensitive time for the market. Over the weekend, an organization called Citrini Research released a report dubbed the "2028 Doomsday Prophecy," detailing the potential shock risks of AI across various global economic sectors, which led to significant declines in U.S. software, delivery, payment stocks, and financial stocks on Monday.

Christopher Waller, another Federal Reserve governor who spoke on Tuesday, held a different view from Citrini. He stated on another occasion that Citrini's report "exaggerates the potential impact of AI on employment" and emphasized that "AI is a tool; it will not replace our existence as humans."

Monetary Policy Faces New Dilemma of Inflation and Unemployment

Cook's core argument is that the unemployment caused by AI is fundamentally different from traditional cyclical unemployment, as the former stems from structural adjustments rather than insufficient aggregate demand, which significantly undermines the effectiveness of monetary policy tools.

She pointed out that when productivity continues to improve and economic growth remains strong, the rise in unemployment due to labor market "churning" does not indicate excess capacity in the economy. In such cases, if the Federal Reserve continues to use traditional demand-side tools to respond, it may not only fail to substantively address employment issues but also further raise inflation.

Cook stated, "Monetary policy decision-makers will face a trade-off between unemployment and inflation... Education, workforce training, and other non-monetary policy measures may be more suitable for addressing these challenges in a more targeted manner."

Cook also emphasized that it is currently impossible to determine the exact trajectory and intensity of this round of labor market transformation. Early signals have emerged in the job market—demand for labor in fields most penetrated by AI, such as programming, has significantly declined, and the unemployment rate for recent college graduates has continued to rise in recent years, partly because some employers are introducing AI into tasks previously handled by entry-level employees.

However, she also noted, "The overall unemployment rate remains low at 4.3%, and recent layoff indicators are still moderate."

AI May First Raise, Then Lower Neutral Interest Rates

Aside from the labor market, Cook provided opposing judgments on the short-term and long-term impacts of AI on neutral interest rates, which is another policy focus of this speech.

She stated that before the productivity dividend is fully realized, large-scale commercial investments related to AI—including data centers and chip procurement—are driving total demand stronger, "the current neutral interest rate may be higher than pre-pandemic levels."

This judgment echoes the views of some Federal Reserve officials, who have recently suggested that the productivity boom triggered by AI could elevate the level of neutral interest rates.

However, Cook also warned of the risk of a reversal of this logic. She pointed out:

"When the productivity gains from AI are more fully realized, or if the transformation of the labor market leads to increased income inequality, giving wealthier consumers a larger share of income, this trend may reverse, and the neutral interest rate will subsequently decline, all else being equal."

In a panel discussion after the meeting, Cook added that the impact of AI may take five to ten years to manifest in productivity statistics at the macroeconomic level.

She also stated that the Federal Reserve has incorporated AI into its forecasting models, including its potential impact on neutral interest rates and the driving effect of data center investments on economic growth.

Internal Policy Discussions on AI at the Federal Reserve Deepen

Cook's speech is the latest example of Federal Reserve policy officials intensively addressing the implications of AI for monetary policy, reflecting that this topic has gradually risen from a marginal issue to a core area of focus for decision-makers at the Federal Reserve.

After three consecutive rate cuts of 25 basis points, the Federal Reserve decided to keep the policy rate unchanged at its most recent FOMC monetary policy meeting in January, citing signs of stabilization in the labor market.

Futures market pricing indicates that investors currently expect the Federal Reserve to resume rate cuts no earlier than mid-year. Cook did not comment on the short-term direction of monetary policy in this speech but mentioned the latest labor market data released after the January meeting, believing that the relevant data reinforces the judgment of market stabilization.

Before joining the Federal Reserve, Cook had been deeply engaged in research on innovation economics for over twenty years, utilizing machine learning methods in her studies, which gives this speech both policy and academic dimensions.

In her opening remarks at the conference, she expressed cautious optimism about the long-term prospects of AI, believing that AI technology will ultimately drive product and process innovation, "making our lives better."

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