Federal Reserve Governor Michael Barr said artificial intelligence could strengthen the U.S. economy over the long term, but warned that widespread adoption could trigger a significant short-term adjustment in the labor market if workers’ jobs are displaced. He urged policymakers and the broader public to prepare early by expanding employment opportunities, job training and pathways into new roles. Barr also backed the Fed’s rate increase earlier this month and said monetary policy may need to tighten further before inflation returns to the central bank’s 2% target.
Barr calls for earlier investment in training and jobs
Speaking Tuesday afternoon at the Detroit Economic Club, Barr said the extent to which AI will replace human labor is not yet clear. But he argued that policymakers and society should prepare for potential changes before they become widespread.
The eventual impact on employment, he said, will depend in part on whether the economy invests in creating new jobs, retraining workers, helping employees move into different roles and taking other steps to limit long-term disruption.
Barr said those issues should be addressed now, while AI adoption is still at a relatively early stage. Early preparation could reduce the cost of adjustment while preserving the longer-term benefits that the technology may bring.
The U.S. labor market remains broadly resilient. Payrolls have increased by an average of about 80,000 jobs a month this year, a pace Barr described as consistent with maintaining balance in employment. The unemployment rate has held near 4.1%.
Still, unemployment among younger workers is higher, raising questions about whether AI-led industries are using technology to replace some entry-level roles rather than simply helping employees perform their work more efficiently.
AI’s effects may vary sharply by occupation
Barr said tasks with clearly defined processes and predictable outcomes may be more vulnerable to labor substitution. Jobs requiring human judgment, management, coordination, interpersonal skills or creativity—and roles where results are difficult to measure—are more likely to be supported or augmented by AI.
The speed of adoption will also shape the difficulty of the labor-market adjustment. Rapid changes could leave workers with too little time to move into new roles and create larger mismatches between employers and employees. Gradual adoption would give businesses and workers more time to adapt.
Barr said the most difficult question for monetary policy concerns AI’s medium-term effects, particularly over the next two to five years.
Data-center investment adds to inflation pressures
Barr said intensifying competition for advanced technology components and a surge in data-center investment were creating demand-side inflation pressure. At the same time, constrained oil supplies and elevated trade barriers were limiting overall supply, making the inflation outlook more complicated.
Inflation readings have remained above the Fed’s 2% target for more than five years. Barr therefore supported the Federal Open Market Committee’s rate increase earlier this month and reiterated that further policy adjustments may be needed to bring inflation back to target in a timely manner.
He said the Fed wants to support sustainable growth and maximum employment, but that price stability is an important condition for achieving those goals.
Economists and market participants disagree on how potential AI-driven productivity gains should be incorporated into economic forecasts. Some AI optimists argue that stronger productivity could reduce inflation and support lower interest rates. Barr noted, however, that faster economic growth could raise investors’ expected returns, while households anticipating higher lifetime income might save less. Those shifts could instead push up the equilibrium interest rate and lead to a higher federal funds rate.
Both interpretations are possible, Barr said, but it is not yet clear whether either set of changes has already taken hold. The immediate fact, he emphasized, is that inflation remains elevated, leaving current economic conditions at the center of monetary-policy decisions.
Barr seeks coordinated action against financial fraud
During a question-and-answer session after his speech, Barr discussed traditional fraud as well as scams involving cryptocurrencies. He cited estimates that cryptocurrency is used to facilitate roughly $600 million to $700 million in fraud each year and said reducing such activity would require coordinated action across government agencies and the financial industry.
Regulators can press banks to strengthen anti-fraud controls, cybersecurity and third-party risk management, he said. Banks should also help customers, tellers and employees identify common scams, while law-enforcement agencies need to treat fraud as a priority.
Individual losses may appear relatively small, Barr said, but the combined social cost can damage the financial system.
Public understanding supports Fed independence
Barr also addressed the Federal Reserve’s independence. He said Fed officials should be protected from political pressure surrounding appointments so they can make difficult policy decisions without fearing retaliation. Maintaining that independence requires support from Congress as well as a public understanding of the Fed’s role.
The better the public understands how an independent Federal Reserve helps serve society, Barr said, the more durable that independence will be.