Nobel Prize-winning economist Paul Romer once wrote that “economic growth springs from better recipes, not just from more cooking.”1 This idea is at the heart of modern economics: raising living standards is not simply about adding more workers or machines, but about helping each worker produce more goods and services of higher quality.
This concept is often captured by the word “productivity,” which measures how much output a worker can generate. Productivity is the main driver of the kind of economic growth that raises wages and improves quality of life. It is also one of the most important questions facing the economy today, as the use of artificial intelligence (AI) continues to grow rapidly.
AI and Federal Reserve (the Fed, which is the central bank of the United States) policy may not seem connected at first glance, but they are linked in important ways. In the short run, both influence financial markets and interest rates. Over the long run, both affect productivity and economic growth. Fed Chair Kevin Warsh recently spoke about these topics at the Fed’s annual symposium in Jackson Hole, Wyoming.2 Given how much AI has already shaped markets in recent years, and the ongoing uncertainty about the Fed’s next moves, what should investors keep in mind from a long-term point of view?
AI and long-run economic growth
To understand why productivity matters, it helps to look at how economists think about growth. Basic economic models focus on workers and “capital,” a term for equipment, machines, and tools. But education and technology are equally important, because they allow workers to get more done using the same amount of capital.
Consider a restaurant: it can serve more meals by hiring more cooks, upgrading its equipment, or training its cooks to work more efficiently. A more knowledgeable doctor with access to better facilities can deliver better outcomes for patients. While economic models simplify the real world, the central idea is clear: producing more and better output per worker, in any field, is what truly drives wage growth and higher living standards over time.
This is why productivity growth is so important, even though it can be hard to measure precisely. What makes AI both exciting and difficult to predict is that it touches nearly all of these factors at once. Depending on how you look at it, AI can act as a substitute for labor, a form of capital, or a tool for creating entirely new methods and technologies. Warsh framed this question in his speech as whether AI would be “complementary or competitive to labor.”
In science fiction, the answer is that AI eventually replaces workers entirely, especially those who work with information, such as data analysts or computer programmers. However, there is not yet strong evidence that this is happening. Current data suggests that AI may instead be another tool that helps workers accomplish more, much like the information technology revolution did in earlier decades. As early evidence of this, some companies are now rehiring workers after previously reducing their workforces because of AI.3
The chart above shows that productivity growth has varied a great deal across different decades, but has generally risen alongside the adoption of new technologies. The economic expansion of the 1990s, for example, was accompanied by a pickup in output per worker, even though it took some time to show up in the data.4
Inflation remains the Fed’s focus
The Fed’s most immediate concern is inflation, which refers to the general rise in prices over time. The Fed’s preferred way to measure inflation is the Personal Consumption Expenditures (PCE) price index. That measure shows inflation running at 3.7% compared to a year ago, while core PCE (which strips out food and energy prices) stands at 3.3%.5 Both figures remain well above the Fed’s 2% target. Progress over the past two years has been limited, in part because higher oil and gasoline prices driven by the conflict in the Middle East have kept inflation elevated. In the short run, this puts the Fed in a tough spot as it tries to support economic growth while keeping prices under control.
Markets have been trying to predict when the Fed might raise interest rates, and this uncertainty has contributed to recent market swings. At present, expectations point to at least one rate increase by the end of this year, and possibly two by the end of the first quarter of next year. These expectations can shift quickly as new economic data and Fed communications emerge, and they have already changed significantly over the past several months.
Over the longer run, however, the picture could look quite different, depending on how AI and other technology trends play out. Technology tends to be naturally deflationary, meaning it can push prices lower over time by enabling more output and higher quality goods. If AI were to meaningfully lift productivity, the economy could sustain faster growth and higher wages, while keeping inflation more moderate over time.
This longer-term view is especially relevant because many of today’s inflation pressures stem from specific recent factors, such as oil prices, data center construction, and semiconductor shortages. These drivers have less to do with monetary policy and productivity, and they could ease over time. However, that process takes time and can include surprises along the way, so it is important for investors to avoid placing too much weight on any single inflation report.
The labor market is a key consideration
In the near term, the labor market (the overall picture of jobs and employment) suggests the economy remains on solid footing. While layoffs have affected some sectors, many of these trends reflect broader cost-cutting and technology adoption, not just AI. Most notably, the unemployment rate (the share of people who want jobs but cannot find them) remains historically low at 4.1%, and has been stable for the past two years. Wage growth has slowed, but at 3.1% year-over-year, earnings are still strong by historical standards.6
Why has unemployment stayed so low even though monthly job gains have been uneven? One reason is that the supply of workers has grown very slowly due to an aging population and reduced immigration. The labor force participation rate (the share of adults working or looking for work) fell to 61% in July, near its lowest level in decades, as more people leave the workforce, including many baby boomers who are retiring.
Restrictions on immigration have also slowed the growth of the available labor pool. When the number of available workers is barely growing, monthly job gains can naturally remain modest, even as workers hold onto their current jobs and companies continue to hire as needed. This may help explain why initial jobless claims (which track the number of workers filing for unemployment benefits after losing a job) remain near historic lows.
Across technology, inflation, and the job market, it is important for investors to weigh short-term factors against long-term trends. In the near term, markets face uncertainty tied to the conflict in the Middle East, the pace of data center construction, and other factors. Over years and decades, productivity growth and broader economic fundamentals are what will ultimately drive financial markets. Maintaining a focus on long-term goals is what will most improve the likelihood of financial success.
The bottom line? The Fed faces a difficult balance between managing inflation and supporting the job market, especially as AI trends continue to unfold. For investors, maintaining a long-term perspective that is aligned with personal financial goals remains the most sound approach.
References
1. https://paulromer.net/economic-growth/
2. https://www.federalreserve.gov/newsevents/speech/warsh20260828a.htm
3. https://www.cnbc.com/2026/07/01/employers-who-laid-off-workers-for-ai-are-reversing-their-decisions.htm
4. https://www.bls.gov/news.release/prod2.nr0.htm
5. https://www.bea.gov/data/personal-consumption-expenditures-price-index
6. https://www.bls.gov/news.release/empsit.nr0.htm
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