On Tuesday, February 24, 2026, Lisa Cook, the governor of the Federal Reserve, suggested that AI could be the reason the central bank will have to make difficult decisions between keeping interest rates elevated to slow inflation from rising or lowering interest rates to address lower employment. Cook explains that AI has been driving productivity, and if this continues, even if firms stop using AI, the labor market will lead to an increase in unemployment. Cook builds on this by saying that because of the AI transition, the new policies the FED is contemplating could have a profound effect on monetary policy. She also discusses that Rate cuts may not be a good solution for this problem, and they may not be able to sole for the increase in unemployment. There, for normal demand-side monetary policy my not be able to solve for unemployment caused by AI. So policymakers such as Cook will be facing a trade-off between unemployment and inflation.
I find the effect that AI has on all aspects of the economy to be really interesting. I was aware of the effect AI would have on the labor force by decreasing available jobs, but I was not aware of the effect it would have on central banks, interest rates, and monetary policy. I think AI may be a good thing because it may help to reduce costs, but I believe that AI will have both positive and negative effects on every aspect of the economy. I imagine that in the next 5-10 years we will have a much clearer idea of the effect AI will have on the economy, but since it is all still so new it is hard to really tell the ramifications of it.
ReplyDeleteAI has taken over so many aspects of life. With this new milestone of AI, even the FED is having a hard time trying to maintain the effects of it. It is interesting to see how much AI has impacted the unemployment rate.
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