Federal Reserve Board Vice Chair Jefferson sets out how AI could affect the dual mandate and monitors sentiment and leverage as financial stability risks

The Federal Reserve Board published a speech by Vice Chair Philip N. Jefferson on how rapid advances in artificial intelligence (AI) could shape the economy and interact with financial stability. He framed AI as a potentially transformative technology that may raise productivity and growth but whose effects on employment, inflation, and the conduct of monetary policy remain highly uncertain. Jefferson described AI as already improving productivity across industries while potentially displacing workers in some occupations, with uncertain net effects on employment and possible transitional “slack” if substitution dominates before new jobs emerge. For prices, he noted that productivity and supply-chain improvements could lower costs and inflationary pressures, while increased spending on AI inputs such as scarce skilled labor, data centers, energy, and land could push some prices up. On financial stability, he assessed the system as sound and resilient and highlighted a Financial Stability Report survey finding that 30 percent of market contacts cited a turn in prevailing sentiment toward AI as a salient risk, up from 9 percent previously, because an unwind could tighten financial conditions. Comparing the current AI-related market with the late-1990s dot-com era, he pointed to differences including stronger earnings among leading AI firms, lower price-to-earnings ratios than dot-com peaks, and a narrower set of publicly traded AI-focused firms, while flagging that AI-related debt financing and corporate bond issuance to fund infrastructure may be rising and could amplify losses if sentiment shifts.