US: AI and Productivity as a Theme of Financial Policy

■ Former Federal Reserve Governor Warsh, nominated as the next Federal Reserve Chairman, advocates for interest rate cuts based on productivity gains from AI.  

■ The Federal Reserve is also studying the impact of AI on productivity and the labor market, but there are some differences in understanding and opinions. 
 
On January 30, U.S. President Trump nominated former Federal Reserve (FRB) Governor Warsh to be the next Federal Reserve Chairman. The appointment requires Senate approval, but the process is expected to face difficulties due to opposition from some members of the Senate Banking Committee, citing the Department of Justice's criminal investigation of current Federal Reserve Chairman Powell and Federal Reserve Governor Cook. 

 
   As a candidate for the next Federal Reserve Chairman, Warsh, during his tenure as a Federal Reserve Governor, opposed the 2011 asset purchase program, arguing that expansionary fiscal policy could accelerate inflation and that blurred lines between the Treasury and the central bank's responsibilities would damage the central bank's credibility. He resigned from his post for this reason. After resigning, he continued to criticize the Federal Reserve's unconventional monetary policies and, in a submission*1 last November, advocated for interest rate cuts and Federal Reserve reform. Regarding the rationale for the interest rate cut, he pointed out that artificial intelligence (AI) can improve productivity, enabling the expansion of the supply of goods and services with less capital and labor input, thus constituting a factor in curbing inflation. He also criticized the Federal Reserve for clinging to the traditional price concept that "economic growth accelerates inflation" and called for a re-examination of the monetary policy framework. Given his words and actions during his tenure as governor, some believe that if he were to become chairman, he might push for a reduction in the Federal Reserve's balance sheet size. However, in recent years, he has emphasized interest rate cuts and Federal Reserve reform, with reducing the balance sheet a relatively lower priority. Furthermore, simultaneously cutting interest rates and reducing the balance sheet would weaken the effect of monetary easing; coupled with the uneven distribution of funds in the short-term financial markets, even in recent years when there was excess liquidity, there have been tight supply and demand for funds, leading the Federal Reserve to restart asset purchases since last December. Against this backdrop, the obstacles to achieving the reduction of the balance sheet are considered high. 

 
   The Federal Reserve is also conducting relevant research on the impact of AI on productivity and the labor market. The minutes of the Federal Open Market Committee (FOMC) meeting held on January 28-29, released on January 18, showed that many participants believed that productivity gains from technological innovation and regulatory reform could be a factor in curbing inflation. Some participants also noted that businesses are utilizing automation to mitigate rising costs. However, several Fed officials stated in recent speeches that productivity gains from AI could stimulate investment demand, pushing up the neutral interest rate level, all else being equal. This view suggests skepticism towards Warsh's argument that productivity gains should be used as a basis for interest rate cuts. Even after the change of Fed chair, the differences among FOMC participants are unlikely to be eliminated in the short term, and the importance of communication strategies regarding monetary policy may further increase.