Rabobank analysts argue that recent Federal Reserve remarks on Artificial Intelligence and interest rates underestimate AI’s disruptive, inflationary and deflationary effects. Analysts highlight physical constraints like electricity and copper rather than capital, and notes that current FOMC thinking may need to change. It warns markets to brace for higher volatility as AI and policy debates evolve.

AI, monetary policy and Fed missteps

"The Fed’s Barr and Daly addressed AI yesterday. The headline, written by Bloomberg AI, is that neither think this potential revolution makes the case for lower rates."

"Barr’s main argument is that AI means the demand for capital would rise because of strong business investment, while “household savings could fall due to expectations of stronger real wage growth and thus higher lifetime earnings.” Daly noted higher growth would dictate a higher neutral rate in “the standard model” because “the demand for investment would rise relative to the supply of savings.” Yet that analysis --which may well be copied and pasted around other institutions as if by AI agents-- lacks sufficient human, let alone artificial intelligence."

"Obviously, AI is going to be inflationary in some areas - it already is. However, it’s got nothing to do with constraints on CAPITAL in a fiat credit-based system with an equity market where ludicrous P/E ratios are normal – indeed, US 10-year yields have been trending down even as AI action has heated up. The real world AI constraints are PHYSICAL: electricity, copper, memory chips, rare earths, etc."

"Equally obviously, AI is going to be deflationary for many other areas. Barr echoes the gibberish early AIs spat out in predicting “expectations of strong wage growth and higher lifetime earnings.” Who is going to be earning more with AI?"

"Setting rates high vs AI would mean deeper disaster for those hit by it. Setting rates too low to help those hit by AI would inflame inflation in the areas boosted by it."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)