Why the Fed Is Now Studying AI's Economic Impact

San Francisco Fed President Mary Daly just declared monetary policy is "in a good place." Translation: it's time to tackle the economic puzzle that's been lurking in the background—artificial intelligence.

The Fed's New Priority

With inflation cooling and employment steady, Daly says the Fed can finally turn its analytical firepower toward AI's economic disruption. It's not academic curiosity driving this shift—it's necessity. The central bank's traditional tools weren't designed for an economy where machines can suddenly do human jobs at scale.

The timing isn't coincidental. The Fed has spent two years fighting inflation with interest rate hikes. Now that battle seems won, they're facing a different challenge: understanding how AI reshapes everything from productivity to employment to price dynamics.

The Job Market Transformation

McKinsey's latest research paints a stark picture: 400 million jobs could disappear while 97 million new ones emerge. That's a net loss of 300 million positions, but the math misses the real story. The jobs being created require completely different skills than those being eliminated.

Consider Goldman Sachs' recent move to automate 60% of its trading operations. Those displaced traders aren't becoming AI engineers overnight. The Fed understands this skills mismatch could trigger wage inflation in tech sectors while creating deflationary pressure in traditional industries.

The Productivity Paradox

Here's the Fed's dilemma: AI should boost productivity, which typically reduces inflation. But AI investment is also creating asset bubbles. NVIDIA's stock surged 240% last year, and commercial real estate prices in AI hubs like Austin and Seattle are soaring.

The central bank's traditional models assume productivity gains translate to lower prices. But what if AI creates a two-tier economy—deflationary for goods and services, inflationary for AI-related assets?

Beyond Interest Rates

Daly's comments suggest the Fed recognizes its current toolkit might be insufficient. Interest rates can't directly address structural unemployment or skills gaps. They can't prevent AI-driven market concentration or ensure the benefits of productivity gains reach ordinary consumers.

The research initiative signals a potential shift toward more targeted policy tools. Think sector-specific regulations or employment transition programs—approaches that go beyond the Fed's traditional mandate.

Global Implications

The Fed's AI research won't stay academic for long. Other central banks are watching closely. The European Central Bank is already exploring "digital euro" implications, while the Bank of Japan studies AI's impact on deflation.

For investors, this represents a fundamental shift. The era of purely monetary policy responses to economic disruption may be ending. The Fed's findings could reshape everything from employment policy to antitrust enforcement.