The U.S. may be entering a period of structurally higher unemployment as companies deploy artificial intelligence tools to conserve labor, a potentially difficult period for the Federal Reserve that cannot necessarily be offset by lower interest rates, outgoing Atlanta Fed President Rafael Bostic told Reuters in an interview.
“We may be in a period of transformation where employers don’t need as many workers as they used to,” said Bostic, who will retire from the Fed when his term expires on February 28. He said rising unemployment would prompt the Fed to consider full employment to manage its dual goals of inflation and employment.
Rather than trying to artificially push unemployment down by cutting interest rates, Bostic said, “we need to really look at the truth of structural changes that are happening” and set interest rates accordingly.
“This is a very difficult time for central bankers and policy makers…Because of structural changes, the same numbers are actually sending different messages about the state of the economy.”
The comment, which was the basis for a parting argument that borrowing costs don’t need to fall from current levels or even lower, represents a reversal of Fed leadership candidate Kevin Warsh’s argument that interest rates can be lowered now because an AI-driven productivity boom will allow the economy to produce more with fewer resources, a situation that should imply lower inflationary pressures.
Mr. Bostic and other Fed officials have raised questions about exactly how productivity changes, if sustained, will unfold and over what period of time, with the Atlanta Fed president noting that more productive companies can get by with fewer employees, a trend that could change the so-called natural rate of unemployment, which the U.S. central bank considers consistent with its 2% inflation target.
Fed officials currently expect the long-term unemployment rate to trend at a median of 4.2%. The unemployment rate in January was 4.3%.
While the Fed can respond to changes in the unemployment rate due to the rise and fall of business cycles, responding to structural changes in labor demand will be the responsibility of fiscal policy, which is more traditionally set by elected officials and covers things like unemployment benefits and retraining programs.
“Addressing short-term problems that are structural in nature could put us in a more difficult situation because both of our policy mandates appear to be going in the wrong direction,” Bostic said, adding that this is why the Fed feels it needs to keep pushing inflation to stay about 1 percentage point above its target.
Speaking up about the need to broadly share economic benefits
Changes in the job market may already have begun, for example, with recent graduates facing a tougher job transition after decades when college graduates had a competitive advantage in hiring.
As the domestic political debate moves away from discussions of inequality, with the Trump administration explicitly putting efforts on “diversity, equity and inclusion” on the back burner, Bostic said he feels the Fed’s continued focus on the “nips” in the economy led policymakers to cut interest rates three times last year. This is something President Donald Trump has been pushing for central banks to continue in a more aggressive manner.
Bostic said the rate cuts were “clearly motivated by underlying weakness in the labor market, and the evidence was in niche areas.” “It was people graduating from college. It was African-American unemployment. … These are the very things that we look at and embrace the concerns and considerations of a segment of the population.”
Mr. Bostic, 59, who has a doctorate in economics and is the first African-American and openly gay district Fed president, has been one of the most outspoken figures within the central bank’s policy-making circles about the need to ensure economic gains are broadly shared, especially when the police killing of George Floyd in Minneapolis in the summer of 2020 focused national attention on issues surrounding social and economic justice.
Despite the backlash surrounding Trump’s bid for a second term in the White House in 2024, Bostic said the central bank is not turning away from research and discussion about how the economy is performing across different regions and ethnic groups, an issue that is considered key to understanding the economy, even as officials acknowledge that monetary policy cannot be targeted at narrow outcomes.
“The[Federal Open Markets]Committee and the entire Fed system have been working pretty hard on thinking more broadly and differently about how the labor market works,” Bostic said, adding that the issue is now tied to new conversations about AI and productivity.
Fed transition
In addition to a Washington-based board of governors appointed by the president and headed by an influential central bank chairman, the Fed system includes 12 local bank presidents who share voting duties on monetary policy and participate in discussions at regular policy meetings, usually held about every six weeks.
Financial institutions as a whole have been under pressure from the Trump administration to cut rates sharply, an effort that included the president’s attempt to fire Fed Director Lisa Cook, the Justice Department’s investigation into Fed Chair Jerome Powell, Mr. Warsh’s long list of criticisms of the Fed and its staff, and even a recent call by White House economic adviser Kevin Hassett to “discipline” the New York Fed’s team of economists over recent tariffs. the study.
Bostic said he is hopeful that at least the guardrails of keeping the Fed an independent agency in making monetary policy decisions will be maintained. Bostic noted, for example, that there is no sense that Fed staff is avoiding various issues because of potential political influence, but that there is more focus on making sure research findings are “descriptive” rather than “prescriptive.”
He also said that Warsh, like other new Fed chiefs, will need to build trust with staff and other central bank and regional governors.
“I think he needs to develop relationships with his staff, relationships with other governors, relationships with the president and others,” Bostic said.
“It’s going to be his job to build those relationships that allow the institution to continue to function…That’s the new chair’s job.”
“One of the things we’ll look at is as far as pressure goes, how he reacts to it. We don’t know until we know about this,” Bostic said.
“When you sit in the chair thinking you know what the job is, you find out what the job actually is. It’s often not the same.”
(Reporting by Howard Schneider; Editing by Paul Simao)
