Fed’s Kashkari Skeptical AI is Replacing Workers, Warns It Could Push Up Rates

In a recent address at the 2025 North Star Summit, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, shared his thoughts on the growing influence of artificial intelligence (AI) on the U.S. economy. While he acknowledged the rapid advances in AI technology, Kashkari expressed skepticism that AI is currently displacing large numbers of workers. However, he warned that investments in AI could impact interest rates, a factor policymakers should carefully monitor.

AI and Employment: Not So Fast

Kashkari emphasized that, despite the widespread hype around AI, evidence of it replacing workers on a large scale is limited. Some companies, like Walmart, have mentioned plans to freeze or reduce staff due to AI adoption, but these claims have not yet resulted in significant layoffs. Kashkari described such announcements as “grand declarations,” noting it’s too early to assume mass job losses are underway.

Economists agree that AI’s effect on employment is complex and sector-specific:

• Automation-focused AI may reduce demand for low-skill labor.
• Augmentation-focused AI can increase productivity for high-skill workers and even create new roles.

This indicates that AI might contribute to rising wage inequality rather than broad unemployment, highlighting the need to look beyond sensational headlines.

Economic Implications: AI Investments and Interest Rates

Even if AI isn’t displacing workers immediately, Kashkari warned that capital allocation toward AI could have broader economic effects. Investments in AI infrastructure, like data centers, might divert funds away from other areas, such as housing development. This shift could raise borrowing costs, potentially pushing interest rates up—even if the Fed lowers short-term policy rates.

For everyday Americans, this could mean:

• Higher mortgage and loan costs
• Potential challenges in housing affordability
• Slower overall economic growth

Policymakers must consider these factors carefully when balancing innovation, growth, and financial stability.

Monetary Policy in the Age of AI

Kashkari also discussed the Fed’s approach to monetary policy amid technological change. He:

• Supported the quarter-point interest rate cut in September
• Suggested additional modest cuts might be needed to support the labor market

However, he cautioned against overly aggressive rate reductions, which could overheat the economy, leading to low unemployment coupled with high inflation.

He further noted that factors like rising tariffs and their inflationary impact underscore the need for a cautious approach. While AI can boost productivity, its indirect effects on capital allocation and interest rates require careful oversight.

Looking Ahead: AI’s Gradual Impact

As AI technology evolves, its influence will expand across industries, labor markets, and daily life. Yet, Kashkari’s cautious outlook reminds us that these changes are likely to be gradual rather than sudden. Different sectors and skill levels will experience AI differently, making its impact uneven across the economy.

For businesses and workers, this presents a mix of opportunities and challenges:

• Opportunities: Increased productivity, creation of high-skill jobs, improved efficiency
• Challenges: Wage disparities, shifts in investment patterns affecting borrowing costs

Balancing Innovation and Economic Stability

Kashkari’s remarks highlight the delicate balance policymakers must maintain. While AI offers significant economic benefits, it also introduces risks that require thoughtful management. Decisions on:

• Interest rates
• Investment incentives
• Labor market support

…will play a critical role in ensuring the economy benefits broadly from AI advances while remaining stable.

In conclusion, Neel Kashkari presents a nuanced view: skepticism about mass job losses is justified, but AI investments could influence interest rates and capital flows, requiring careful consideration. Continuous monitoring and policy adjustments will be essential to maximize AI’s benefits while mitigating risks, ensuring sustainable economic growth.