Fed’s Barr signals patience on rates, warns AI boom could be inflationary in the near term

Federal Reserve Governor Michael S. Barr painted a cautious picture of the US economy and the implications of rapid AI adoption for monetary policy and the labor market.

Speaking Tuesday before the New York Association for Business Economics in New York, Barr began by outlining the central bank’s current view of economic conditions, noting that the US labor market has “stabilized” after a slowdown last summer, with unemployment near levels consistent with a balanced economy.

However, job creation and labor force growth remain tepid, suggesting a fragile equilibrium that “could be especially vulnerable to negative shocks.”

On inflation, Barr said price pressures remain too high, with personal consumption expenditures stubbornly elevated around 3 percent.

He explained that inflation’s deceleration has slowed, in part due to goods price increases tied to tariffs, and added that tariffs’ fading influence later this year may not be enough to ease inflation. “I see the risk of persistent inflation above our 2 percent target as significant, which means we need to remain vigilant,” he said.

Given these conditions, Barr emphasized that monetary policy should not rush into rate cuts.

“Based on current conditions and the data in hand, it will likely be appropriate to hold rates steady for some time as we assess incoming data, the evolving outlook, and the balance of risks,” he said, underscoring that a clear retreat in goods inflation would be needed before considering lowering the policy rate.

AI impact on economy

Shifting to his primary topic, Barr explored how the explosive growth of generative AI might reshape the economy.

He described AI as a potential general-purpose technology akin to steam power or electricity, that could dramatically increase productivity and transform industries. But he cautioned that historical patterns of technological change show that innovation often creates short-term disruptions even when long-term gains are substantial.

Barr noted that early evidence suggests firms are using AI to improve efficiency, such as speeding up complex tasks and enhancing quality in software development, but he also stressed that technology can cause labor market upheaval.

“Periods of rapid technological change are often accompanied by anxiety about the economic and social consequences of automation,” he said, stressing the uncertainty around how deeply AI will affect employment and wages.

He flagged that if AI significantly boosts long-term productivity, it could raise the economy’s equilibrium interest rate, known as r*, ultimately implying a higher neutral rate than previously thought. And in the short term, the surge in energy demand from AI infrastructure could even add near-term inflationary pressures.

“For all of these reasons, I expect that the AI boom is unlikely to be a reason for lowering policy rates,” Barr said.

Summing up, Barr stressed that while AI holds promise for lifting productivity and living standards over time, policymakers and society must prepare for potential disruptions, and the Fed must remain vigilant before adjusting monetary settings in response to these structural shifts.