No. of Recommendations: 1
A far greater concern I have over the Fed's inflation-targeting framework than the exact target itself is how it will function in a AI-driven economy.
If AI and robotics significantly reduce the cost of labor at scale, we will enter a period of sustained, productivity-driven deflation as costs of most goods and services plummet.
In a world without Fed inflation targets, that deflation would greatly increase real consumer purchasing power as each dollar would buy far more than it used to, effectively distributing the gains of technological progress into the hands of consumers through lower prices.
But if the Fed maintains its commitment to broad inflationary targets (even a 0% target), it could respond to those productivity-driven falling prices with large scale monetary expansion to offset it.
Historically, the lion's share of the Fed's money printing has flowed into financial assets such as stocks and real estate, not into the pockets of consumers.
The implication is important: instead of allowing AI-driven productivity to translate into materially lower costs and higher real purchasing power for all, current Fed policy could inadvertently redirect a large share of those gains into asset prices while keeping prices elevated.
Asset holders (e.g., the wealthiest) would benefit disproportionately, while non-asset holders (e.g., the average Joe) would not, robbing the general public of one of the key benefits of an AI-driven future and increasing inequality in the process.
And in such a scenario, where AI may already be causing meaningful short-term labor displacement, this would further compound the burden on those already affected.
This is a conversation the Fed needs to be having now, before these dynamics begin to fully play out.
