The transformative potential of Generative AI and the future of Finance as discussed by Federal Reserve Chair for Supervision Michael S. Barr at the Council on Foreign Relations.
New York, NY – In a recent speech at the Council on Foreign Relations, Federal Reserve Vice Chair for Supervision Michael S. Barr explored hypothetical scenarios concerning the rapid advancement and integration of artificial intelligence (AI) into the economy. 10 days before Barr steps down from his position, his speech focused specifically on Generative AI (GenAI), a subset of AI known for content creation and productivity enhancement across various knowledge-based activities.
GenAI Adoption and Potential
GenAI is poised to become a “general purpose technology” due to its widespread adoption, continuous improvement, and potential for productivity enhancements across various sectors.
Agentic AI, a more advanced form of GenAI, can proactively pursue goals by generating innovative solutions, potentially leading to breakthroughs in research, development, and problem-solving.
Hypothetical Scenarios
Barr outlined two hypothetical scenarios to consider how GenAI could evolve:
- Incremental Progress with Widespread Productivity Gains: In this scenario, GenAI primarily augments existing processes, leading to steady productivity gains without fundamentally transforming the economy.
- Impact: Efficiency increases, personalized solutions across industries, and improvements in healthcare, education, and manufacturing. The economy would likely grow at a faster pace.
- Labor Force: GenAI could level up skills and align lower-performing workers with higher-performing ones. However, some workers may face displacement and need to retrain.
- Financial Stability: GenAI may magnify existing vulnerabilities and sources of resilience in the financial system.
- Transformative Change: In this scenario, GenAI adoption extends beyond current capabilities, providing new expertise that transforms the economy and society.
- Impact: Rapid breakthroughs in biotechnology, robotics, and energy, reshaping industries and creating new ones. Healthcare could see therapies that target genetic mutations and cure previously incurable diseases.
- Labor Force: While humans may manage multi-agent GenAI frameworks, some workers may face job displacement, requiring broader conversations about organizing the economy.
- Competitive Landscape: Rewards for businesses may be unevenly distributed, concentrating economic power in firms that control GenAI breakthroughs.
- Finance: The financial system could undergo fundamental changes, requiring new institutions, markets, and products to facilitate transactions.
Recommendations
To harness the potential benefits of GenAI and minimize its risks, Barr suggested:
Financial institutions, including the Federal Reserve System, should invest in understanding GenAI technology and training staff to use it responsibly.
Financial institutions, including the Federal Reserve System, should invest in understanding GenAI technology and training staff to use it responsibly.
- The financial regulatory community should approach the changing landscape with agility and flexibility.
- Collaboration between governments, private industry, and research institutions is crucial to ensure GenAI systems are not weaponized.
- Prioritizing AI governance to ensure the technology enhances, not replaces, humans, with a focus on data quality and addressing biases.
- Monitoring how the introduction of GenAI changes the banking landscape, including the potential for nonbanks to drive intermediation to less-regulated areas.
Barr emphasized that elements of both scenarios will likely be present and influence the economy and society at different rates. He noted the importance of understanding the implications of new technologies like Agentic AI for individuals, businesses, and markets.
