Central banks typically aim to keep prices stable, maintain a healthy labour market and ensure financial stability. The rapid adoption of artificial intelligence (AI) complicates all three objectives by changing the signals and relationships policymakers rely on.
Findings from the BIS
A recent paper by the Bank for International Settlements (BIS) in Basel — often described as the central bank for central banks — argues that AI is blurring conventional indicators used for policy decisions. The authors are Iñaki Aldasoro, Leonardo Gambacorta, Enisse Kharroubi and Matthias Rottner.
The BIS notes that AI affects both demand and supply simultaneously and does so through cyclical and structural channels. Effects vary across sectors, which complicates assessments of underlying trends, and the heightened uncertainty increases the risk of policy miscalibration.
Near-term investment boom and demand effects
In the United States and other AI innovation hubs, a near-term investment surge has boosted demand for semiconductors and components for data centres. A concurrent stock market rally is increasing consumer demand via higher paper wealth, though there are concerns that some of that wealth may be illusory and that an AI-driven asset bubble could eventually burst.
Medium-term labour risks and productivity gains
The BIS cautions that AI could lead to large-scale job losses in the medium term, but current evidence on whether significant displacement has already begun is murky. Conversely, if AI produces substantially higher productivity growth, that would act as a positive supply shock and could reduce inflationary pressure.
Policy implications for central banks
A central challenge is that AI likely alters unobservable variables central to macro policy, such as the natural rate of interest and the natural rate of unemployment. Central banks — including the Federal Reserve (whose policy meeting referenced in the article ends on Wednesday) and the Bank of England and Bank of Japan (each meeting on Thursday in the article’s timeline) — must make real-time judgements about the direction, magnitude and timing of AI’s effects on these variables.
If policymakers overestimate supply gains or underestimate demand pressures from AI-related investment and wealth effects, they risk keeping rates too low and stoking inflation. The opposite error — tightening policy excessively — could unintentionally trigger a recession.
Domestic review efforts
The article notes that Fed chairman Kevin Warsh has convened task forces to examine the Fed’s strategic stance. One task force is explicitly charged with studying AI’s impact on the labour market and productivity, while other groups are examining related topics such as inflation measurement and economic data collection. Their findings and recommendations are due by year-end.
Conclusion
According to the BIS analysis, AI’s simultaneous, heterogeneous effects on supply and demand and on both cyclical and structural dimensions complicate central bank policy. The resulting uncertainty raises the likelihood of policy mistakes, with implications for inflation, employment and financial stability.
