The 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 our standard of living is not simply about adding more workers or equipment, but about helping each worker produce more goods and services, and better ones at that.
Economists measure this with the concept of “productivity,” which refers to how much output a worker can produce. Productivity is the key driver of the kind of economic growth that improves wages and quality of life. It is also one of the most important questions today, as the use of artificial intelligence (AI) continues to grow rapidly.
AI and Federal Reserve (Fed) policy might not seem connected at first glance, but they are linked in important ways. In the short term, both affect financial markets and interest rates. Over the long term, both have an impact on 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 significantly AI has already influenced markets in recent years, and the ongoing uncertainty about the Fed's direction, what should investors keep in mind from a long-term perspective?
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 just as important, because they allow workers to produce more using the same amount of capital.
Consider a restaurant: it can serve more meals if it hires more cooks, upgrades its equipment, or trains its cooks to work more efficiently. Similarly, a doctor with better knowledge and more advanced facilities can deliver better outcomes for patients. While economic models simplify the real world, the central idea is that producing more and better output per worker, in any field, is what truly improves wages and living standards over time.
This is why productivity growth is so important, even though it is hard to measure precisely. What makes AI both exciting and difficult to predict is that it affects nearly all of these factors at once. Depending on how you look at it, AI can act like labor, like capital, or like a tool for creating entirely new methods and technologies. Warsh framed this in his speech as the question of whether AI would be “complementary or competitive to labor.”
In popular imagination, AI might replace workers entirely, especially those doing information-based tasks like data analysis or computer programming. However, there is not yet clear evidence that this is happening on a large scale. Current data suggests that AI may instead serve as another tool that helps workers accomplish more, much like the rise of information technology did in previous decades. Supporting this view, some companies that previously reduced their workforces due to AI are now rehiring.3
The chart above shows that productivity growth has varied widely across different decades, but tends to rise when new technologies are widely adopted. The economic expansion of the 1990s, for example, was accompanied by a pickup in output per worker, even though it took time to show up in the data.4
Inflation remains the Fed's focus
Right now, the Fed is focused primarily on inflation, which is the general rise in prices over time. The Fed's preferred way to measure inflation is the Personal Consumption Expenditures (PCE) price index. This index shows that inflation rose 3.7% compared to one year ago, while core PCE (which leaves out food and energy prices) rose 3.3%.5 Both figures remain well above the Fed's 2% target. Progress over the past two years has been limited, partly because of higher oil and gasoline prices tied to the conflict in the Middle East. In the short term, this puts the Fed in a tough spot as it tries to support growth while keeping prices under control.
Markets have been trying to predict when the Fed might raise interest rates, which has led to recent volatility. 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 guidance emerge, and they have already changed considerably over the past several months.
Over the longer term, however, the picture could look quite different, depending on how AI and other technology trends unfold. Technology tends to push prices down over time, because it enables more output and higher quality goods. If AI were to boost productivity meaningfully, the economy could support faster growth and higher wages with more moderate inflation over time.
This 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 could ease over time. Still, that process takes time and can bring surprises, so investors should be cautious about reading too much into any single inflation report.
The labor market is a key consideration
In the near term, the labor market points to a healthy economy. While some sectors have seen layoffs, many of these trends reflect broader cost-cutting and technology adoption rather than AI specifically. Most notably, the unemployment rate (the share of people looking for work who cannot find it) remains historically low at 4.1%, and has been stable for the past two years. Wage growth has slowed somewhat, but at 3.1% year-over-year, earnings remain strong by historical standards.6
Why has unemployment stayed low even when job gains have been uneven? One key reason is that the supply of available workers has grown very slowly, due to an aging population and reduced immigration. The labor force participation rate (the share of adults who are working or actively looking for work) fell to 61% in July, near its lowest level in decades, as more people leave the workforce, including many baby boomers reaching retirement age.
Restrictions on immigration have also slowed the growth of the available labor pool. When the number of available workers is barely increasing, monthly job gains can naturally be modest, even as workers hold onto their jobs and companies continue to hire when needed. This may help explain why initial jobless claims (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 alongside long-term trends. In the near term, markets face uncertainty tied to geopolitical developments, the pace of data center construction, and other factors. Over longer periods of years and decades, productivity growth and broader economic trends are what will shape financial markets. Staying focused on long-term goals is what will most improve the likelihood of financial success.
The bottom line? The Fed faces a difficult balance between inflation and the job market, especially as AI trends continue to develop. For investors, it's best to maintain a long-term perspective aligned with financial goals.
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