AI has "penetrated" the Federal Reserve! July meeting minutes mention it multiple times, with comprehensive influence from inflation to employment

According to Zhitong Finance APP, anxiety induced by artificial intelligence is ubiquitous, from ordinary workers worried about unemployment to investors warning of financial bubbles. Now, it has begun to dominate internal discussions at the Federal Reserve. According to the minutes of the U.S. central bank’s latest policy meeting, this technology featured prominently whenever decision-makers considered almost any economic aspect. In the 15 paragraphs dedicated to discussing current conditions and the economic outlook, AI was mentioned no fewer than 18 times.

"The discussion about AI was not only lengthy but also extremely broad in scope," said Derek Tang, an economist at Monetary Policy Analytics. "AI is now affecting them from multiple angles—they are considering it in their predictions for inflation, employment, and financial stability. It seems to have permeated every corner."

Even before ChatGPT was made available to the public in 2022, the economic impact of AI had already been a topic of debate among economists. The discussions often focused on the potential of this technology to boost productivity for workers and businesses—that is, to achieve more output with the same or even less capital and labor. This could translate into higher economic growth without bearing the burden of higher inflation.

Federal Reserve officials have also been contemplating this possibility. But their recent public remarks and the July meeting minutes indicate that officials are equally concerned that, even though the timing and magnitude of productivity gains remain highly uncertain, AI may bring shocks to the economy in the short term that will need to be addressed.

Dual Mandate Under Pressure

The Federal Reserve shoulders two key objectives for a healthy economy: price stability and full employment. While there is constant public concern that AI could lead to mass unemployment, Fed officials are growing increasingly vigilant about its potential impact on inflation.

In recent years, a series of shocks have pushed up price pressures, including tariffs and the spike in oil prices triggered by the U.S.-Iran war. These factors reignited inflation that had cooled somewhat after the pandemic. Now, with U.S. inflation exceeding the 2% target for over five years, officials are considering whether AI investment could trigger a new round of price pressures. This is already being reflected in the way AI infrastructure construction is driving up chip and software prices, and subsequently the prices of consumer products like smartphones.

"Several participants assessed that the impact of AI infrastructure construction on consumer prices has so far been limited to certain categories," the meeting minutes indicated. "However, other participants believe that AI investment has already had a broader impact on prices by boosting overall demand, or they assess that this situation will occur soon."

This debate touches on a core issue that has troubled Federal Reserve officials for months. Some believe that current inflationary pressures are temporary, which will allow the central bank to keep rates unchanged because price pressures will eventually fade on their own. Others—including three dissenting officials who voted in favor of a rate hike last month—see broader evidence of inflation.

AI is also exerting contradictory pressures on the labor market. On one hand, it is destroying some entry-level white-collar positions and even higher-level computer programming jobs; on the other hand, the construction of data centers is creating shortages of skilled workers in certain areas. Earlier this summer, Dallas Fed President Lorie Logan spoke about this issue in west Texas—data center construction near El Paso is leading to shortages of electricians, plumbers, and construction workers.

"Several participants assessed that the net impact of AI-related developments on employment has been limited so far, with some workers being replaced and others benefiting from jobs created by AI infrastructure," the meeting minutes stated.

Too Early to Tell

However, many decision-makers agree that it is still too early to judge whether AI can deliver on its immense economic potential.

As with the rapid transformation brought about by personal computers and the internet in the 1990s, AI seems omnipresent, yet has not yet been reflected in productivity data. However, the biggest optimists include economic officials from the Trump administration and Kevin Warsh, who joined the Federal Reserve as a governor this May.

"AI will be a significant disinflationary force, raising productivity and enhancing U.S. competitiveness," he wrote in a column last year. "If annual productivity growth increases by one percentage point, living standards will double within a generation."

Many of Warsh’s colleagues at the Federal Reserve share this anticipation but remain cautious at the same time.

Financial Stability

"Several participants noted that AI-related investment may increase productivity and potential output growth in the coming years," the meeting minutes stated. "But these participants also pointed out that there is considerable uncertainty about the timing and magnitude of the potential productivity boost."

Subsequently, several officials warned that the Federal Reserve should be prepared for scenarios in which the prospects for AI fail to materialize; the meeting minutes noted that this "would lead to a significant repricing in the stock market, which would in turn negatively affect consumer spending." Officials also warned that abrupt shifts in market pricing could put pressure on financial institutions involved in AI-related lending.

"Several participants emphasized that capital expenditures in the AI space are increasingly being financed through borrowing, including credit provided by non-bank investors or regional banks," the minutes said.

It is also noteworthy that officials pointed out during the meeting that AI is creating new layers of risk in areas that have long been a concern for the Federal Reserve—namely, cybersecurity. In April of this year, the U.S. Treasury urgently convened the heads of major U.S. banks for a meeting, which was also attended by then Fed Chairman Jerome Powell, to discuss threats posed to cybersecurity by new AI tools.