AI, the Labor Market, and the Fed's Next Move

SPEAKER_1 (0:00)

Joining me now from the New York Stock Exchange is Ben Emons, CIO and founder of Fed Watch Advisors. Ben, happy Friday to you. Thanks for joining us today. As we look at AI right now, I mean, you said in your notes that I was reading, we've reached a point where the rapidly rising capability and falling inference costs are really starting to reinforce each other. So what does that mean for the AI economy and the broader economy going forward?

Ben Emons (0:28)

Yeah, it's good to be here. Thank you for having me here from the New York Stock Exchange.

So what that means is that as AI develops itself rapidly, there's been a projection out there that the cost of AI will decline because you're getting more and more models online, you're getting more competitors in the space, and that's just the nature of how that technology does operate. But what it means for the economy itself is that we'll probably see even more AI rather than less despite all this regulatory threat currently, meaning there has to be safeguards on AI. I would actually say if there is more federal regulation of AI, it will actually almost blossom the AI sector in itself, in addition to that AI finds itself now into almost every corner of the economy, whether you think of retail or industrial or healthcare or financial sector, AI is showing up everywhere. So the influence cost then by itself goes down, but AI itself affects the economy, I think very positively creating more productivity than what we're currently experiencing.

SPEAKER_1 (1:33)

One of the parts when we have this productivity conversation is just the overall capabilities of AI. How much it can perform in these complex tasks that would take humans so much more time previously, and working alongside humans while also sometimes not needing any oversight at all. So as we start to get more of these layoff announcements, we're getting a bit of a mixed bag about when certain companies are laying off in favor of AI versus just general layoff structure. At what point does this shift from being a productivity story to a meaningful labor market disruption?

Ben Emons (2:13)

Yeah, and I think that that is true, that there will be labor substitution for AI in certain particular professions. I can think of editing or some kind of analyst position or related administrative positions, but then it also creates jobs and it's more job openings now that require AI skills.

And there's now people who built their own firms, like myself actually, you know, I'm a one man, quote, quote, one man firm that is purely based on AI. And as a result, my business increased, I'm going to hire someone now. So I think it's a sort of a mixed picture of layoff versus hiring when it comes to AI.

But then when you think about it more stepping back, you know, it gets at some point, I guess, that there's a certain form of automation that may threaten the broader labor force. And there are federal bills or like bills in Congress currently that try to at least limit that impact. I think that there will be political focus on that if it does adversely affect employment more broadly, that there will be more regulation to limit the impact from AI. Other than that, I think it's a positive productivity story and ultimately will create more employment, rather less.

SPEAKER_1 (3:26)

While we're talking about the labor market and of course I have to honor the name of your firm, Fed Watch Advisors, we have to talk about the Fed and the rate hike that we got this week. As far as what you were expecting, were you in any way surprised by the hike itself or by any of the commentary from Kevin Warsh or by the fact that we are signaling potentially this being a part of a broader hike cycle?

Ben Emons (3:50)

So, I guess that the decision was really discounted because there was some form of guidance given by a variety of Fed members ahead of the meeting and then we had data that confirmed that guidance like CPI as an example and that cemented this probability of a hike that led to the hike. Instead of the view that long-term interest rates drove the Fed to this hike, but it is obviously a story about that the desk had become more than just one hike because we're dealing with an unstable prices. If you just look at what's going on in diesel currently, where it's getting unhinged and diesel does affect broadly a lot of prices in the economy because of transport in particular, then there's more hikes likely needed why the interest rates have started to correlate with the price of diesel and sort of reflecting that the Fed will react to these types of developments, not treated like a transitory energy shock for that matter because these are such a broader impact on the economy. So the surprising part, I guess, was that in the projections itself for rate increases, there were the first two years rate increases projected, but then after that, they tapered off a lot. I thought that was somewhat surprising because if this Fed is serious about it, it has to go on for a bit longer than maybe one or two years to get inflation really under control, to get price stability.