How the Fed would respond to AI-pocalypse (www.axios.com)

If widespread AI-driven automation slashes labor demand while boosting output, the Federal Reserve would likely lean into monetary stimulus — cutting interest rates and loosening policy — to pursue its congressionally mandated goal of "maximum employment," even amid robust GDP growth. The Fed’s dual mandate prioritizes price stability and employment over growth alone, so a productivity-fueled, low-inflation “AI‑pocalypse” could prompt rate cuts similar to the 2002–2003 episode when the Fed pushed its target rate down to 1% during a jobless recovery. Policymakers have explicitly acknowledged that strong growth with weak jobs fits squarely within their remit to support the labor market. That said, monetary policy has structural limits: lowering rates can stimulate demand and accelerate labor reallocation but cannot fully replace jobs lost to automation. Technically, an AI-driven positive productivity shock tends to depress inflation and raise output, altering the optimal policy mix and increasing the need for complementary fiscal measures — retraining, unemployment supports, and policies to shift labor into new sectors. The core implication for the AI/ML community is clear: breakthroughs that raise productivity will reshape labor markets and macro policy, spurring debates over how monetary and fiscal tools should be combined to manage distributional impacts even as markets celebrate higher growth.