Radical opinions on the economy aren\u2019t hard to come by right now: Tech titans, economists, Wall Street giants, and politicians have all suggested that AI will be transformative, but can\u2019t agree on whether it will be for good or evil. Extreme divides in opinion are also appearing over policy: be it trade, immigration, interest rates, or national debt. <\/p>\n
The Federal Reserve Bank of Chicago\u2019s President and CEO, Austan Goolsbee, is less concerned with prophecies of chaos or prosperity\u2014he\u2019s more focused on the reality<\/a> of American consumers, and the businesses they work for.<\/a><\/p>\n In a landmark Jackson Hole speech last week, new Federal Reserve chairman Kevin Warsh said inflation was the sharpest focus<\/a>, at present, for the rate-setting Federal Open Market Committee (FOMC), of which Goolsbee is a member. The reason: Price rises are comfortably ahead of the central bank\u2019s mandated 2% target, pushed higher by supply-side shocks like the Middle East oil upset and tariffs.<\/p>\n Speaking exclusively to Fortune, Goolsbee agreed with the balance of concerns Warsh laid out: \u201cOn the real side, we\u2019ve been stable, now inching toward dangers of overheat, and on the inflation side, after a couple of years of strong progress, it stalled out and started getting worse. But, we\u2019ve had one encouraging report, one OK report, and now our challenge is \u2026 the inflation.\u201d<\/p>\n The employment side of the Fed\u2019s mandate looks relatively stable across data points such as the unemployment rate, vacancy rate, hiring rate, and the layoff rate, Goolsbee explained: \u201cI think that\u2019s been largely\u2014not the result of AI data centers, for much ballyhoo\u2014it\u2019s the U.S. consumer. Broad-based consumer spending growth is the thing that has kept the economy solid and stable.\u201d <\/p>\n And while everyone is closely watching AI\u2019s impact on the labor market\u2014be it layoffs, productivity gains, or demand for certain skills needed for infrastructure\u2014Goolsbee is particularly concerned about potential economic overheating. He explained: \u201cI would characterize the expansion of the data centers as very hot, but largely shoving other parts of the economy down.\u201d\u00a0<\/p>\n \u201cThe rise has been stepping on others\u2014they\u2019re competing for the resources. When I\u2019m touring around the 7th district, people [are] saying: \u2018We\u2019re having to scale back our plans because getting construction workers is too expensive, you can\u2019t get HVAC,\u2019 etc. That implies a sector rebalance, that is different from an aggregate overheating, [but] that said, we\u2019re not far from that turning into aggregate overheating.\u201d <\/p>\n If the impact of data center buildouts spreads further through the economy\u2014pushing up services inflation, for example\u2014\u201dthat would make me more nervous,\u201d said Goolsbee. The 10th president of the Chicago Fed explained he was comfortable with holding the base rate at the last FOMC meeting in July because the most contemporary inflation data had shown some improvement (the all items CPI reading<\/a> was down 0.4% in June, and a flat 0.1% in July) \u201cso it makes sense to wait and see if this has legs, or is just a blip.\u201d <\/p>\n Promises vs reality<\/p>\n AI has produced some sparkling outlooks for the global economy: Nvidia\u2019s Jensen Huang believes that while there will be some labor disruption, the technology will be a net job creator \u201cat a scale that we have never seen.\u201d<\/a> Tesla<\/a> CEO Elon Musk said AI will make money essentially irrelevant and work a hobby<\/a>, while Meta\u2019s Mark Zuckerberg wrote that AI,<\/a> in a healthily balanced economy, will see \u201coverall\u00a0productivity and\u00a0innovation\u00a0increase\u00a0while\u00a0employment\u00a0levels\u00a0remain\u00a0high.\u201d<\/p>\n Meanwhile, Goolsbee is thinking about the \u201cgrubby day job\u201d of the Fed, saying the impact of AI on monetary policy depends on how expected the outcomes are.<\/p>\n \u201cIf the productivity lands on us in an unexpected way, inflation goes down, and rates can go down,\u201d Goolsbee explained. \u201cBut the more expected it is, and the bigger the hype \u2026 it leads to just old-fashioned overheating in the short run, because equity values go up and so the businesses launch massive capital investment in the here and now, people start spending out of their equity-well in the here and now, before the productivity bounty has arrived.\u201d\u00a0<\/p>\n \u201cIt\u2019s fun to engage in the academic exercise of dreaming [about] how AI will affect the long-term growth in the United States or the global economy, and we should think that through, but for the grubby day job of the Federal Open Market Committee, it\u2019s not at all clear.\u201d <\/p>\n There\u2019s also the question of when these massive gains come to pass. In 1987, Nobel Prize-winning economist Robert Solow\u00a0remarked: \u201cYou can see the computer age everywhere but in the productivity statistics\u201d. This is the basis of the Solow Productivity Paradox<\/a>, suggesting that productivity may slow\u2014or at least lag expectations\u2014with technological advancements.<\/p>\n