By Nicole Goodkind

The White House has argued that a surge in productivity driven by artificial intelligence will give the Federal Reserve room to lower interest rates without stoking inflation. Federal Reserve governor Michael Barr doesn't see it that way.

In a speech on Tuesday at the New York Association for Business Economics, Barr said that even if AI ultimately lifts growth, it is unlikely to justify easier monetary policy any time soon. If the technology meaningfully boosts long-run productivity, he said, it could actually push so-called equilibrium interest rates higher.

That refers to the level of rates that neither boosts economic growth nor slows it down. A higher neutral rate would imply that over time, interest rates would tend to be higher than they have been.

Barr described a labor market that appears stable but fragile. Job creation is weak and layoffs are low. That combination suggests supply and demand for workers are roughly aligned, but "delicate," and vulnerable to negative shocks.

Inflation has cooled from its post-pandemic highs, and Barr said it is reasonable to expect tariff effects to begin abating later this year. But he sees a "significant" risk that inflation remains stuck above the Fed's 2% target. Inflation in the prices of goods, in particular, needs to show sustained improvement before he would consider supporting additional rate cuts, assuming labor market conditions remain stable.

It will "likely be appropriate," he said, to hold rates steady for some time while officials assess incoming data and the evolving outlook. AI is unlikely to change that, he added.

So far, the aggregate data about AI and labor don't show a dramatic shift. Productivity growth has been elevated for several years, beginning in the pandemic, when tight labor markets spurred investment in labor-saving technologies and new business formation surged. It is possible AI has contributed more recently. But the research to date is consistent with what Barr described as a gradual-adoption scenario.

The labor-market implications are also nuanced. So far, he said, AI hasn't produced a meaningful change in overall employment or unemployment, though there are early signs of strain for some groups, including younger workers.

Research suggests AI can take the place of people doing some tasks, yet the overall effects on employment have been modest, in part because firms are reallocating workers internally rather than conducting large layoffs. A New York Fed survey found that companies using AI are more likely to retrain workers than to cut headcount.

In any case, Barr said, monetary policy can't solve structural changes in the labor market. If AI permanently reduces demand for certain types of jobs, the natural rate of unemployment could rise. The Fed can address cyclical downturns, but it can't reverse long-term shifts in labor demand.

That creates a difficult problem for policymakers. If unemployment rises, officials will have to determine whether they are facing a temporary downturn that calls for rate cuts, or a structural adjustment driven by technology.

Barr's base case is that disruptions will be painful but temporary, with productivity gains eventually lifting real wages and supporting growth. But if AI delivers a sustained increase in productivity, it would also raise the economy's equilibrium interest rate, known as r-star.

Stronger productivity could allow wages and output to grow faster without sparking inflation. At the same time, heavy business investment in AI infrastructure would increase demand for capital. If households expect higher lifetime earnings, they may save less. Both forces would tend to push up equilibrium interest rates. Barr said he has already modestly raised his long-run estimate of r-star in part because of higher productivity.

There is also a near-term inflation risk. Building and operating data centers requires enormous energy inputs. If electricity supply constraints collide with surging demand, that investment wave could add price pressures rather than relieve them.

Investors betting that AI will hand the Fed an easy path to lower rates may want to think again, according to Barr.

"For all of these reasons," he said on Tuesday, "I expect that the AI boom is unlikely to be a reason for lowering policy rates."

Write to Nicole Goodkind at nicole.goodkind@barrons.com

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February 17, 2026 13:40 ET (18:40 GMT)

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