Fed races to adapt to AI promises and pitfalls for jobs, inflation

• Block CEO Jack Dorsey cut 4,000 jobs citing AI enabling 'a new way of working' with smaller teams, demonstrating AI's potential to disrupt white-collar work like coding and data analysis
• Fed Governor Lisa Cook and colleagues argue AI-driven unemployment may not indicate economic slack, meaning traditional rate cuts could fuel inflation rather than help displaced workers
• Fed research on AI has accelerated dramatically from nearly zero articles before ChatGPT's late 2022 release to 17 in 2024 and 14 already in early 2025, reflecting urgent efforts to understand the technology's economic effects

Fed Grapples with AI's Dual Impact on Employment and Inflation

Federal Reserve officials are divided on how artificial intelligence will affect the labor market and prices, as exemplified by Block's announcement Thursday to cut 40% of its workforce (approximately 4,000 workers) due to AI-driven efficiency changes.

Key Market Implications

The Fed faces a complex policy challenge: while rising unemployment traditionally prompts rate cuts, AI-related job losses may require a different approach. Several officials, including Fed Governor Lisa Cook, warn that AI-driven unemployment may represent structural change rather than cyclical slack, meaning rate cuts could fuel inflation without solving joblessness.

Policy Divide

Dovish View: Fed Chair nominee Kevin Warsh advocates for lower rates, arguing AI is "a significant disinflationary force" that boosts productivity—echoing Alan Greenspan's 1990s approach.

Hawkish View: Adam Posen of the Peterson Institute counters that AI currently creates inflationary pressures through wealth effects and capital investment strains, with "very little disinflation."

Data Points

• Fed's natural unemployment rate estimate: 4.2%
• AI-related Fed research jumped from 5 papers in 2023 to 17 in 2024, with 14 already this year
• Brookings research (2024) found many occupations could see half their tasks "disrupted" by AI

Broader Impact

Unlike previous automation affecting blue-collar jobs, AI threatens white-collar positions including coding and data analysis. Block CEO Jack Dorsey noted AI enables "fundamentally different" company operations with "smaller and flatter teams."

Fed officials acknowledge extreme uncertainty in AI forecasts, with Richmond Fed President Tom Barkin noting predictions "are going to be wrong"—the question is whether they'll prove too optimistic or pessimistic.