WASHINGTON — Federal Reserve Vice Chair Philip Jefferson said artificial intelligence could meaningfully reshape inflation and interest rates in the years ahead, arguing that durable productivity gains from the technology may push the economy’s “neutral” interest rate higher and complicate the path of future rate cuts.
Speaking at the Brookings Institution, Jefferson struck a cautiously optimistic tone about the economy while underscoring that AI’s effects could require the Fed to keep policy tighter than it otherwise would.
Jefferson said the U.S. economy remains resilient, with growth likely to run near last year’s pace of about 2.2% and the labor market settling into a low-hiring, low-firing pattern. Inflation, however, has stalled near 3%, a development he linked partly to tariffs. He said productivity improvements — including those tied to early AI adoption — could ultimately help bring prices back toward the Fed’s 2% goal.
At the same time, Jefferson warned that the transition to an AI-driven economy could be inflationary in the near term. He noted that the current boom in data centers and AI-related investment is boosting demand today, which could lift prices unless offset by monetary policy. In his view, the biggest productivity payoff from AI likely lies ahead, meaning the inflationary and growth effects are still unfolding.
Crucially for rate policy, Jefferson argued that if stronger productivity proves persistent, the economy’s neutral interest rate is likely to rise — at least temporarily. Faster productivity would encourage consumers to spend more now in anticipation of higher future incomes while also lifting business investment, both of which increase demand and warrant higher real interest rates.
Jefferson said the Fed’s recent 175 basis points in rate cuts have likely brought policy close to neutral for now, but he stressed that future moves will depend on incoming data.