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Fed's Cook (voter) says neutral rate could fall over time

Fed's Cook suggests the neutral rate may decline over time due to potential shifts in AI productivity and labor market dynamics, indicating a more complex monetary policy landscape ahead.

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  • The neutral rate could reverse when the AI productivity gains are more fully realised, or if the labour market transition leads to a rise in income inequality, which could lower the neutral rate, all else equal.
  • Says AI-driven investment surge means it is possible that the current neutral rate is higher than before the pandemic.
  • Policymakers would face tradeoffs between unemployment and inflation, with education and workforce policy potentially better suited to address these challenges in a more targeted way.
  • Cook says that in a productivity boom, a rise in unemployment may not indicate increased slack, and normal demand-side monetary policy may not be able to ameliorate an AI-caused unemployment spell without also increasing inflationary pressure.
  • Cook says that the unemployment rate is still at a low 4.3%, recent measures of layoffs remain subdued, but does not yet know the exact evolution of this labour-market transition nor its intensity.
  • Cook says job displacement may precede job creation such that the unemployment rate may rise and participation in the labour force may decline as the economy transitions.
Context

This could signal a re-evaluation of policy trade-offs between inflation and unemployment, especially as AI reshapes job creation and displacement. The implications for rates could lead to lower expectations for future hikes if policymakers lean towards addressing inequality and targeted workforce strategies.

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