By Howard Schneider
WASHINGTON, Feb 24 (Reuters) – The U.S. may be entering a period of structurally higher unemployment as firms deploy artificial intelligence tools to save labor, a potentially challenging moment that the Federal Reserve would not necessarily be able to offset with lower interest rates, outgoing Atlanta Fed President Raphael Bostic told Reuters in an interview.
“We could potentially be in a transformational period where employers don’t need as many workers as they did before,” raising the jobless rate that the Fed would consider full employment for purposes of managing its dual inflation and employment objectives, said Bostic, who will step down from the regional Fed bank at the end of his current term on February 28.
Rather than trying to artificially push the jobless rate lower with rate cuts, “if we are having structural change, then we really need to lean into that truth,” Bostic said, and set interest rates accordingly. “This is a very hard time to be a central banker and a policymaker … Because of structural change, the same number is actually sending a different message about where the economy is.”
The comments, the basis for his parting argument that borrowing costs don’t need to fall much further, if at all, from their current level, represent the flip side of the case Fed chief nominee Kevin Warsh has made that rates can come down now because an AI-driven productivity boom will let the economy produce more with less, a situation that should imply diminished inflation pressure.
Bostic and other Fed officials are raising doubts about how exactly the shift in productivity, if it is sustained, will play out and over what period, with the Atlanta Fed chief noting that more productive companies can get by with fewer workers – a trend that could change the so-called natural rate of unemployment that the U.S. central bank would see as consistent with its 2% inflation target.
Fed officials at the median currently consider the underlying long-run unemployment rate to be 4.2%. The jobless rate was 4.3% in January.
While the Fed can react to changes in unemployment that stem from the ebb and flow of the business cycle, the response to a structural shift in labor demand would be more traditionally the province of fiscal policy, set by elected officials and covering things like jobless benefits and retraining programs.
“To address short-run issues that are structural in nature could put us at risk of a much more difficult situation, where both of our mandate measures seem to be moving in the wrong direction,” Bostic said, a reason why he feels the Fed needs to keep pressing on inflation that remains about a percentage point above target.
OUTSPOKEN ABOUT NEED FOR ECONOMIC GAINS TO BE SHARED BROADLY
The shift in the job market may already be underway, with new college graduates, for example, facing a tougher transition into jobs after decades in which college degree holders had a built-in advantage in hiring.
At a time when national political discourse has shifted away from discussions of inequality, with the Trump administration explicitly discouraging initiatives around “diversity, equity and inclusion,” Bostic said he felt the Fed’s continued focus on the “niches” of the economy is what led policymakers to cut interest rates three times last year – something President Donald Trump has demanded the central bank continue in a more aggressive fashion.
The rate cuts “were explicitly motivated around potential weakness in labor markets, and the evidence of that was in the niches,” Bostic said. “It was people out of college. It was African-American unemployment rates. … Exactly those things where we are paying attention and taking on board the concerns and considerations of segments of the population.”
Bostic, 59, who has a PhD in economics and is the first Black and openly gay president of a Fed regional bank, has been among the most outspoken within the central bank’s policymaking circles about the need to ensure economic gains are broadly shared, particularly in the summer of 2020 when the police killing of George Floyd, a Black man in Minneapolis, focused public attention on issues around social and economic justice.
Despite the backlash that developed leading up to Trump’s election in 2024 to a second term in the White House, Bostic said the central bank has not turned away from research or discussion of how the economy is performing across different geographic areas or ethnic groups, issues that are considered key to understanding the economy even if officials also acknowledge monetary policy can’t target narrow outcomes.
“The (policy-setting Federal Open Market) Committee and the Fed system writ large have been pretty committed to thinking more broadly and differently about how labor markets work,” Bostic said, an issue that is now tied into the emerging debate about AI and productivity.
TRANSITION AT THE FED
Along with the Washington-based Board of Governors, appointed by the president and led by the influential chair of the central bank, the Fed system includes 12 regional bank presidents who share voting duties on monetary policy and participate in debate at the regular policy-setting meetings, typically held about every six weeks.
The institution as a whole has been pressured by the Trump administration to deliver deep rate cuts, an effort highlighted by the president’s attempt to fire Fed Governor Lisa Cook, a Department of Justice investigation into Fed Chair Jerome Powell, Warsh’s long list of criticisms of the Fed and its staff, and even a call recently by top White House economic adviser Kevin Hassett that a team of New York Fed economists be “disciplined” for recent tariff research.
Bostic said he had hope that the guardrails maintaining the Fed as an independent institution, at least in setting monetary policy, will hold. There is, for example, no sense that the Fed’s staff are shying away from different issues because of the potential political fallout, Bostic said, though he noted there is heightened attention to ensure that research findings are “descriptive” and not “normative.”
He also said Warsh, like any new Fed chief, would need to build trust among the staff, other central bank governors, and the regional presidents.
“He needs to have a relationship with his staff. I think he needs to have a relationship with the other governors and relationships with the presidents and others,” Bostic said. “That’s going to be his work to build those relationships in ways that can allow the institution to continue to function … That’s the work for any new chair.”
“One thing we’ll see is how, to the extent that there is pressure, … he responds to it. We won’t know until we know on this,” Bostic said. “You think you know what the job is, and then you get in the chair, and then you find out what the job really is. Often (it is) not the same.”
(Reporting by Howard Schneider; Editing by Paul Simao)
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