NEW YORK —Federal Reserve Governor Michael Barr said Tuesday that artificial intelligence could reshape the labor market and broader economy in ways that present both major opportunities and significant risks, warning that financial institutions should prepare for disruptions ranging from shifting workforce needs to new pressures on inflation and interest rates.
Speaking at the New York Association for Business Economics, Barr said AI appears increasingly likely to become a general-purpose technology comparable to electricity or personal computers, with widespread implications for productivity, business models and employment.
Barr said early data suggest the U.S. labor market has stabilized after slowing last year, though he described the balance between labor supply and demand as fragile. Inflation remains around 3%, above the Federal Reserve’s target, and Barr indicated policy rates are likely to remain steady for some time as officials watch whether goods inflation retreats. For financial institutions, that signals a prolonged period of elevated rates while policymakers assess the economic effects of tariffs, productivity shifts and technological change.
Turning to AI, Barr said adoption has accelerated rapidly, particularly among large firms in sectors such as finance, insurance and professional services — industries closely tied to major banks and other financial institutions. He pointed to survey data showing growing use of generative AI in business functions but noted that most firms remain in early experimentation phases, suggesting productivity gains may take time to materialize as organizations rework processes, retrain employees and absorb upfront costs.
Barr said early evidence indicates AI has not yet materially affected overall unemployment, but some groups — especially younger workers entering AI-exposed fields such as software development and customer service — are beginning to see weaker hiring prospects. Rather than widespread layoffs, he said businesses appear to be reallocating workers internally and emphasizing retraining.
For banks and other financial firms, Barr outlined two major scenarios: a gradual adoption path that lifts productivity without severe labor-market damage, and a faster, disruptive “jobless boom” in which automation sharply reduces demand for certain roles. He also warned of a third possibility in which heavy AI-related investment — potentially requiring massive capital spending — outpaces economic returns, raising the risk of financial stress similar to past technology investment cycles. Such dynamics, he said, could shift risk from the labor market to the financial system if expectations for AI-driven demand fall short.
Barr said AI’s long-term effect is likely to raise productivity and living standards, but he cautioned that the transition could bring short-term dislocations requiring investment in worker training and policy responses beyond monetary policy. He added that AI-driven investment and higher productivity could place upward pressure on equilibrium interest rates, meaning the technology boom is unlikely to justify lower policy rates.