Federal Reserve's Barkin says AI and Iran conflict increase economic uncertainty

Investing.com – Richmond Federal Reserve Bank President Tom Barkin stated on Friday that economic uncertainty has intensified over the past year, with advancements in artificial intelligence and the conflict in Iran creating what he described as an “increasingly deepening fog” for policymakers and businesses.

Barkin made his remarks at the Appalachian Highlands Economic Forum held at East Tennessee State University in Johnson City, Tennessee, noting that while many policy issues from last year have been resolved, new sources of uncertainty have emerged. He pointed out that AI capabilities are rapidly advancing, with Block announcing plans to replace 40% of its employees with AI, and AI investments announced within a week nearing $700 billion.

Barkin indicated that the conflict in Iran has added another layer of uncertainty, leading to soaring oil prices and supply chain disruptions. He noted that oil price shocks have historically coincided with economic recessions in 1974, 1979, and 1990.

Despite the uncertainty, the economy grew by 2% last year, and recent credit card data shows that consumers continue to maintain spending. Barkin attributed this to low unemployment rates, rising real wages, and increasing asset values. Corporate profits in the fourth quarter saw double-digit growth.

The unemployment rate has hovered around 4.4% for the past six months, a level that has only been seen three times in recent decades. However, job growth is close to zero, and younger workers are struggling to find jobs. Barkin explained that the low hiring rates are offset by a decrease in net immigration and the Baby Boomer generation exiting the labor market.

Inflation remains nearly one percentage point above the Federal Reserve’s 2% target, although it has decreased from above 7% in 2022. Barkin stated that housing price growth has slowed, wage pressures have eased, but recent PCE inflation data suggests that progress may be stagnating.

Regarding the labor market, Barkin mentioned that employers report sufficient labor supply, with multiple applicants for each position, facing minimal wage pressures. Turnover rates are low, and given strong productivity, high uncertainty, and the potential impact of AI, employers remain hesitant to hire.

On the impact of AI on employment, Barkin remarked that most discussions currently focus on unemployment issues, but he believes there is potential for income and job growth through better sales targeting and expansion opportunities, provided the skills mismatch problem can be addressed.

The Federal Reserve has cut interest rates by 175 basis points over the past 18 months, placing the federal funds rate at the higher end of the neutral range. Barkin stated that at the recent meeting, the Fed decided to hold rates steady to wait for clearer signals, given the risks in both the labor market and inflation.

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