Barr: AI to profoundly disrupt labor markets, boost long-term growth
Federal Reserve Governor Michael S. Barr outlined that artificial intelligence will deeply disrupt labor markets in the short term but lead to profoundly positive long-run economic effects. He also indicated that the Federal Reserve will likely hold policy rates steady for some time due to persistent inflation above target.
Inflation remains elevated, rates to hold steady
Federal Reserve Governor Michael S. Barr shared his current views on the economy and monetary policy, noting that the labor market is stabilizing after slowing last summer.
The unemployment rate is broadly consistent with its long-run level, though job creation and labor force growth have been near zero over the past year.
Barr described this as a delicate balance, making the labor market vulnerable to negative shocks.
Inflation, based on personal consumption expenditures, remains elevated at 3 percent, consistent with a year ago.
Disinflation slowed last year due to goods price inflation picking up, largely attributed to tariffs.
Barr sees the risk of persistent inflation above the 2 percent target as significant, necessitating 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, awaiting evidence of sustainably retreating goods price inflation, provided labor market conditions remain stable.
AI: A new general-purpose technology
Artificial intelligence, especially generative AI, is increasingly likely to become a general-purpose technology, marked by widespread adoption and a cascade of downstream innovations.
Barr noted AI's potential as an 'invention in the method of invention,' enhancing research and development efficiency.
Historically, such technological shifts lead to long-run productivity gains, but can deeply disrupt labor markets in the short term.
Unlike routine automation, AI can learn to complete complex, nonroutine tasks by inferring patterns from data.
The adoption speed of AI is rapid; as of December 2025, 17 percent of U.S. businesses report using AI, with this figure rising to 79 percent for generative AI among large firms since 2023. This rapid pace allows less time for workers and businesses to adapt.
Navigating the AI transition
While AI's transformative potential is clear, its widespread adoption faces significant hurdles, including the need for fundamental business practice changes and worker retraining.
The Federal Reserve's internal success with AI in modernizing technology offers a tangible example of immediate productivity gains.
Ultimately, the speech highlights that navigating AI's disruptive impact on the labor market requires deliberate societal adaptation, not just technological advancement.