Perspective

Jackson Hole: AI May Change More Than Productivity

Why the Next Challenge for Monetary Policy May Be Interpreting an Economy That Is Changing Faster Than Our Models

As investors look toward Jackson Hole, one of the most important questions may not be whether AI boosts productivity, but whether it changes the way policymakers interpret the economy itself. If AI ultimately delivers the productivity gains many expect, we believe it could influence long-term growth, corporate profitability and living standards. The challenge is that the transition is unlikely to be linear-and perhaps more importantly, the framework through which monetary policy interprets the economy may have to evolve with it.

Today’s economy already resists simple labels. Even the popular description of a “K-shaped” economy may no longer fully capture what is happening. Treasury Secretary Scott Bessent, and previously Hilton CEO Christopher Nassetta, have described something closer to a “C-shaped” economy, where outcomes may be beginning to converge across income groups.^1,2 Bank of America CEO Brian Moynihan has made a related, though more data-oriented, observation: the bank’s spending figures suggest consumer activity is broadening and wage growth across income groups may be converging, even as meaningful differences remain.³ The larger point is that recent economic data suggest the economy may be becoming harder to describe through any single narrative. For strategists and advisors, we believe this presents a different challenge-not simply getting the destination right, but preparing for the path and the weather along the way.

These realities present an important challenge for Chair Kevin Warsh and the Federal Reserve. The latest economic data only reinforces the complexity. Earlier in the week, second-quarter productivity surprised to the upside while unit labor costs remained relatively contained.⁴ ISM Services pointed to healthy underlying demand even as prices remained elevated.⁵ The August 7 employment report then added another layer of nuance: payroll growth came in softer than expected, prior months were revised lower and average hourly earnings moderated.⁶ Rather than resolving the policy debate, the week’s data broadened it. Growth appears to be slowing gradually, productivity may be improving and inflation pressures continue to ease-but not uniformly. That is precisely the type of environment in which policymakers must place greater weight on interpretation than simple reaction.

If AI simultaneously raises productivity while the investment required to build that future continues to support demand, should the Fed evaluate inflation and employment through the same lens it has used historically? The destination may ultimately be lower inflation through productivity. The transition, however, may prove considerably more complicated than markets currently anticipate. Productivity gains can improve supply while the investment required to create them simultaneously supports demand. Add a labor market that is cooling gradually rather than deteriorating abruptly, and we believe policymakers may find themselves navigating an economy that continues to expand while inflation declines only incrementally. Increasingly, the challenge may be distinguishing between cyclical slowing and structural improvement.

We believe Jackson Hole may, therefore, prove significant not because it changes policy immediately, but because it changes the questions policymakers are asking. Has AI begun to alter the relationship between productivity, employment and inflation? Is the neutral rate of interest gradually moving higher as investment demand strengthens? How should policymakers distinguish between productive capital formation and cyclical overheating? Does a gradually moderating labor market require the same policy response as one that is deteriorating rapidly? And perhaps most importantly, should policymakers become more comfortable acknowledging that the economy itself may be changing faster than the historical relationships embedded in many forecasting models?

While these questions evolve, investors should also remember that the Federal Reserve and the U.S. Treasury serve different purposes. The Fed’s mandate is maximum employment and price stability, supported by maintaining policy credibility. Treasury’s responsibility is financing the government’s borrowing needs efficiently while preserving deep and liquid capital markets. Those objectives frequently reinforce one another, but periods of elevated deficits, changing productivity and shifting inflation dynamics can cause their preferred outcomes to appear less aligned. Investors should be careful not to interpret every move in rates or every policy discussion as evidence of conflict. More often, it reflects different institutions responding to different responsibilities within the same changing economy.

One of the more interesting developments this week is that thoughtful investors could reasonably reach very different conclusions from the same data. A productivity optimist could see stronger long-term growth. A bond investor may focus on moderating wage growth and a gradually cooling labor market. An equity investor may emphasize improving corporate efficiency, while a central banker sees an economy that continues to challenge traditional policy frameworks. None of those interpretations are necessarily inconsistent. They simply emphasize different aspects of an increasingly complex economic landscape.

Markets often appear more effective at pricing long-term expectations than periods of transition, particularly when the economy itself is redefining the path toward those expectations. For advisors and asset allocators, that may be the larger lesson. Markets are adjusting to a changing economic framework in real time. Policymakers, businesses and investors are all learning together, making the process inherently iterative rather than linear. Rather than trying to predict every Fed decision or movement in yields, we believe the more important question may be whether portfolios are prepared for volatility, correlations and market leadership to evolve as this new equilibrium is discovered.

Looking at Jackson Hole-and the reporting and debate that follow-I believe the dispersion of views and the differing concerns of policymakers, businesses and investors may ultimately prove more instructive than any immediate market reaction. As we consider the panoply of opportunities and challenges ahead, perhaps the defining challenge of the next economic cycle will not be forecasting the economy, but recognizing that the economy itself may be changing faster than the models we use to forecast it. If that proves true, being right about the destination may ultimately matter less than being prepared for the journey.