Fed’s Barr Calls for Guardrails as Financial Sector Adopts AI
(Bloomberg) — Federal Reserve Governor Michael Barr said there needs to be clear guardrails to prevent risks as the financial industry looks to adopt AI in its core functions.
In his speech at the Singapore FinTech Festival on Wednesday, Barr said regulators need to get the balance right between innovation and stability to ensure that artificial intelligence increases growth and productivity in the long term.
“I worry that if we only talk about the United States, we will let the pendulum swing too far and let our guardrails down in a way that exposes us to too much risk,” he said on a panel with other central bankers.
He said the financial industry is rapidly moving to use AI in its work such as customer service, document summarization, sales and marketing and public relations. “But companies are also starting to explore how generative AI can fit into their core functions. And this is an area that requires great care.”
According to Barr, policymakers must ensure that technology does not introduce risks from market manipulation and collusion. It flagged a scenario where AI systems trade with each other in ways that increase volatility and even create systemic risk.
Regulators also need to be wary that AI could be trained on skewed data or techniques that could introduce new biases into the financial system, he said.
Fed officials have opted to cut benchmark interest rates at each of their last two policy meetings following a sharp slowdown in hiring over the summer. Recent comments from the public suggest they are divided on the need for a third rate cut in December, but investors are betting on one, according to futures.
The Fed governor said artificial intelligence will transform economies, but there are various implications for how this will play out. First, the adoption of generative AI can augment existing tasks and roles. Second, it can lead to a transformative effect, where work and leisure undergo radical change that increases efficiency and reshapes firms with new business models.
“These kinds of different scenarios and many intermediate steps in between are possible, and we need to pursue them,” Barr said.
In his prepared remarks, Barr noted a New York Fed survey showing that artificial intelligence is leading employers to scale back hiring plans — a development the Fed governor suggested may be contributing to slower job creation — but did not comment on the short-term outlook for monetary policy.
He also noted the possibility that planned trillions of dollars of capital investment in data centers could lead to significant economic change, including productivity gains.
“Investment in capital generally increases labor productivity and offers the potential for higher output growth without pressure on inflation over the long term,” Barr said. “As I have discussed in previous speeches, if these changes are significant, they could also affect the course of monetary policy.”
(Re-edited with Barr’s comments on AI regulations.)
More stories like this available Bloomberg.com
