Fed’s Jefferson says AI may lift productivity, but inflation still calls the shots

In a speech to students, faculty, and business leaders, Jefferson framed AI as a slow-moving productivity story colliding with a persistent inflation problem. He opened by revisiting past technological advances to draw lessons for the present, rather than making direct AI predictions.

This speech is part of a broader series where Jefferson has addressed AI's economic impact on multiple occasions since November 2025. He has described AI as a potential structural shock that reshapes how the economy works rather than a temporary phenomenon.

Dual Impact

Jefferson highlighted how AI affects the economy from both directions simultaneously. On the supply side, automation could make workers and businesses more productive over time, potentially enabling growth without inflation. On the demand side, however, companies are currently investing heavily in data centers and AI infrastructure, adding to aggregate demand.

Fed's Dilemma

This timing creates a challenge for the Federal Reserve, which must balance its dual mandate of maximum employment and price stability. Jefferson has noted that inflation has remained above the Fed's 2% target for more than five years, with risks tilted to the upside.

Other Fed officials have similarly warned that sustained capital spending on AI infrastructure could produce inflationary outcomes in the near term. Jefferson has also considered how AI might affect the neutral rate of interest—the theoretical rate that neither stimulates nor restrains the economy—with sustained productivity growth potentially pushing it higher.