WASHINGTON, March 2 : U.S. Federal Reserve officials who have largely accepted that artificial intelligence will lead to dramatic shifts in the economy are now struggling to understand the pace and extent of what's to come, with a divide emerging over its potential to impact the labor market and prices.

The announcement by tech firm Block on Thursday that it would shed 40 per cent of its workers, roughly 4,000 people, because "something has changed" in how it uses labor due to AI, highlighted the stakes. 

Rising layoffs would traditionally lean central bankers towards looser monetary policy. The AI transition, though, has raised a different response, with officials saying higher unemployment rates may be par for the course ahead, with displaced workers taking longer to find new jobs and the higher capital returns and wages for those still working keeping upward pressure on inflation.

"We're in the part of the cycle where this is a positive, real shock, but most of it is in the form of positive real income and very little disinflation," with stock gains padding some households' wealth, and massive capital investment straining electricity and building costs in some areas, Adam Posen, president of the Peterson Institute for International Economics, said in a discussion about inflation, estimating U.S. price pressures would build from here. Those seeing AI as a near-term disinflationary force "have got it exactly wrong."

WARSH READY TO BANK ON AI DISINFLATION?

That group includes Fed chair nominee Kevin Warsh, who feels interest rates should fall in part to account for AI-driven productivity gains holding down inflation.

Warsh, who must still be formally nominated and confirmed by the Senate, argued in a November Wall Street Journal op-ed that AI is "a significant disinflationary force, increasing productivity and bolstering American competitiveness," and could be best accommodated by the Fed with lower rates.

Warsh's narrative, which he casts as a forward-looking stance similar to former Fed Chair Alan Greenspan's in the mid-1990s, has been met by growing caution among Fed policymakers about how fast AI will translate into staffing practices and whether the historical rule of thumb will hold that new technologies displace jobs but ultimately create even more.

Citrini Research's thought exercise last week, warning of a jobs apocalypse, triggered a brief but significant stock selloff, a sign of how unsettled investors ...