FED: Daly: Must Be Open-Minded When Monitoring AI Impacts

SF Fed’s Daly (’27 voter) yesterday gave in-depth remarks on potential impacts from AI, cautioning on the need to be open-minded in assessing monetary policy implications whilst also referring to monitoring micro data and business liaisons. The Q&A was more directly monetary policy focused, reiterating that the Fed is now modestly or slightly restrictive (chiming with remarks earlier this month that she thinks one or two more rate cuts may be needed) whilst AI is unlikely to impact the neutral rate in the short-term. Her comments compare with Fed Gov. Barr earlier in the day who concluded that the Fed should hold rates steady for some time and sees the AI boom as unlikely a reason for lowering rates.

• From the speech (link): “It is easy to see the possibilities but harder to know when and how they will evolve. So far, most macro-studies of productivity growth find limited evidence of a significant AI effect. Even firms that say it’s useful find little evidence of transformative gains. Some of this could be timing. […] But it could also be that we are simply not there yet.”
• Looking back to the mid-1990s: “Then-Chair Greenspan offered a different view. He distrusted the official productivity numbers, finding them at odds with the surge in information technology investment we were seeing. He posited that the burgeoning computer revolution would spur sustained productivity growth, allowing the economy to grow faster without putting upward pressure on prices. In this scenario, the economy would not need to be bridled, and interest rates would not need to increase. He found evidence for this possibility in the disaggregated micro data, including what he was hearing from executives.”
• Liaison programmes are particularly important: “talking to businesses matters.  Businesses invest, experiment, and learn long before we see it in aggregate productivity data. Incorporating this information and seeing how it supports or negates what we expect is essential to making appropriate policy decisions.”
• “It is a reminder that monetary policy is a forward-looking business. To get it right, we must be grounded in what we see and open-minded to what’s possible.”
• From the Q&A: An AI-induced acceleration in productivity growth would dictate a higher neutral rate in “the standard model” because “the demand for investment would rise relative to the supply of savings” but any analysis would be far from clear cut.
• “Maybe it raises the neutral rate a little bit. We need to be a little humble about what we think the impact on the neutral rate will be.”
• The no hiring, no firing state of the labor market makes the economy a little vulnerable, pointing out that there hasn’t really been job growth outside of health or education sectors.
• The Fed needs to get inflation down and make sure it’s on a good path.