Michael Barr outlines AI's labor market impact, cautious on inflation
Federal Reserve Governor Michael S. Barr stated the central bank will likely hold interest rates steady for some time, citing persistent inflation and a delicate labor market balance. He also discussed the profound, yet disruptive, impact of artificial intelligence on the economy and labor market.
Inflation persists, rates on hold
Federal Reserve Governor Michael S. Barr noted that the labor market has stabilized, with an unemployment rate consistent with its long-run level.
Job creation, however, has been near zero over the last year, indicating a 'delicate balance' in labor supply and demand, vulnerable to negative shocks.
Personal Consumption Expenditures (PCE) inflation remains elevated at 3 percent, about where it was a year ago.
Disinflation, which began in mid-2022, slowed last year due to rising goods prices, partly from tariffs.
Barr forecasts tariff effects to abate later this year but sees a 'significant' risk of persistent inflation above the 2 percent target, requiring vigilance.
He stated that the prudent course for monetary policy is to take time to assess conditions, and it will 'likely be appropriate to hold rates steady for some time' to evaluate incoming data and the balance of risks.
From steam engine to AI
Federal Reserve Governor Michael S. Barr characterized artificial intelligence, especially generative AI, as a likely general-purpose technology, comparable to the steam engine or electricity.
He noted its potential for widespread adoption, continuous improvement, and downstream innovation, also acting as an 'invention in the method of invention' by boosting research and development efficiency.
Barr acknowledged short-term labor market disruption but stressed the long-run positive effects on productivity and living standards.
AI's capacity to perform complex, nonroutine tasks by learning from examples significantly expands automation.
Adoption has been rapid: by December 2025, 17 percent of U.S. businesses reported using AI, with 30 percent of large firms adopting it.
Generative AI use among large firms surged from 33 percent in 2023 to 79 percent in 2025.
AI: Promise and peril
AI's rapid adoption, though promising for productivity, demands substantial societal adaptation, including worker retraining and fundamental business practice changes.
The Federal Reserve's internal success with generative AI, cutting code modernization time by 50 percent, showcases its immediate practical benefits.
However, the broader economic transition remains complex, demanding careful navigation to mitigate short-term disruptions and ensure equitable long-term gains.