Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / How the AI Economy Is Reshaping Blue-Collar Wages and the Fed's Dilemma
Transcript
- Lucas: The big story in the economy right now isn't the Fed holding at three-point-six-four percent — it's what's happening under the surface. Blue-collar wages are rising faster than white-collar wages for the first time in years, and artificial intelligence might be the reason. Luna: That runs counter to everything we've heard about AI coming for the factory floor. Are you saying AI is actually helping blue-collar workers? Lucas: Not helping — reshaping. A new report from the Federal Reserve Bank of Philadelphia shows that job postings in manufacturing and logistics now require more technical skills, but the pay for those roles is climbing at nearly six percent year-over-year. Meanwhile, white-collar postings are growing more slowly and wages are up only three percent. Luna: So the AI effect isn't just replacing jobs — it's upgrading them. That puts pressure on the Fed in a different way. Lucas: Exactly. The Fed is watching wage growth because it feeds into services inflation. If blue-collar wages keep rising at five-plus percent, that's going to keep core inflation elevated. And we already see it in the data: core CPI hit three-three-five-point-four in April, up from three-three-four-point-one-seven in March. That's not a rounding error. Luna: And yet the ten-year yield is falling — it's down to four-point-five-six percent as of today. The bond market seems to be saying inflation is under control, or at least that growth is slowing enough to pull yields down. Lucas: That's the tension. The ten-year Treasury yield has dropped over two percent in the last five days, even as the ten-year breakeven inflation rate ticked up from two-point-three-nine to two-point-four-zero. So real yields are actually falling. That means bond investors are pricing in weaker growth, not lower inflation. Luna: Weak growth plus sticky inflation — that's the classic stagflation signal. But the consumer sentiment data is already at a record low, partly because of the Iran war and higher energy prices. So consumers are feeling the pinch. Lucas: Right. The University of Michigan sentiment index hit its lowest level on record in May. People are worried about inflation and the geopolitical situation. And yet, the Fed is stuck. They can't cut because inflation is still above target, and they can't hike because the economy is showing signs of slowing. Luna: Kevin Warsh is in a tough spot. His first few months as Fed chair have been all about managing expectations — the bond market tested him, and he held firm. But this ai driven wage shift is a new variable. Lucas: And it's not just wages. The AI economy is also changing where jobs are located. A lot of the new manufacturing jobs are in smaller cities in the Midwest and South, where labor markets were already tight. That's pushing up local wages and making it harder for the Fed to get a national read on inflation. Luna: So the Fed's traditional tools — the fed funds rate, forward guidance — they might not work as well when the economy is structurally changing underneath them. Lucas: That's the conversation happening in FOMC meeting rooms right now. Some regional Fed presidents are arguing that the neutral rate — R-star — has moved higher because of AI investment and fiscal spending. Others say the economy is still fragile and the Fed should be ready to cut if the labor market softens. Luna: Where do you come down? Is the Fed going to cut this year? Lucas: I don't think they do unless something breaks — a credit event, a sharp rise in unemployment, or a sudden drop in the stock market. The S&P is at seventy-four-seventy-three, up one percent in the last five days. The Russell two-thousand is up three-point-four percent. Markets are doing fine. The Fed can wait. Luna: But the bond market is doing the heavy lifting — the ten-year yield falling is effectively an easing of financial conditions. That might give the Fed cover to hold steady. Lucas: Exactly. And that's why this moment is so interesting. The AI economy is boosting blue-collar wages, the bond market is loosening policy for them, and the Fed gets to sit on its hands. But if inflation doesn't come down, they'll have to act. Luna: I want to go back to something you said about the Russell two-thousand. Small caps are up sharply. That's often a sign that investors expect rate cuts soon. Lucas: It is. But it's also a bet that the ai driven reshoring is real — that smaller domestic companies will benefit from the build-out of factories and data centers. So the market is pricing in both: rate cuts and stronger growth. That's a Goldilocks scenario. But it's fragile. Luna: And the bond vigilantes are watching. If they think the Fed is behind the curve, they'll sell bonds and push yields back up. That's what happened in April when Kevin Warsh first took over. Lucas: Right. The vigilantes are always waiting. The difference now is that the ten-year yield is already down, so maybe they're satisfied. But the five-year yield is still at four-point-two-six percent, and the two-year is at three-point-five-eight. The curve is still inverted, which historically is a recession signal. Luna: But the economy isn't in recession — at least not yet. The AI boom is creating real demand for workers, and consumer spending is still positive, even if sentiment is low. Lucas: That's the paradox. The economy is stronger than the sentiment data suggests, and the labor market is tighter than the headline unemployment rate shows. The Fed has to navigate that without oversteering. Luna: Let's talk about the energy side. The Iran war is rattling oil markets, and we saw that headline about Putin and Xi trying to revive a gas pipeline. How does that factor into the Fed's calculus? Lucas: It's a wildcard. Higher energy prices feed directly into headline CPI, which makes the inflation problem worse. But they also reduce consumer spending power, which slows growth. The Fed can't control energy prices, so they have to look through the volatility. But the longer it lasts, the more it becomes a core issue. Luna: And there's a trade angle too — the uk gulf deal could shift global trade patterns, which might affect supply chains and prices over time. Lucas: Exactly. All of this is happening while the Fed is trying to communicate a clear path. Kevin Warsh has been careful to say that the Fed is data-dependent, but the data is moving in contradictory directions. Luna: It feels like the Fed is a prisoner of the data. Every month, inflation comes in a little hot, but growth comes in a little slow. They can't win. Lucas: And that's why this moment is so fascinating. The AI economy is creating a structural shift that might make the Fed's job harder for years. We're not going back to a world where wage growth is two percent and inflation is stable at two percent. Luna: We try to make sense of all these moving parts for you every week, and we deliberately keep this show free of ads. If you find that valuable, you can support us at buy me a coffee dot com slash fexingo — it helps us stay independent and focused on the substance. Lucas: Yeah, and we appreciate everyone who has taken that step. It really does make a difference in letting us dig into topics like this without worrying about commercial breaks. Luna: So back to the AI wage shift. Lucas, what should our listeners be watching for in the next couple of months? Lucas: I'd watch the weekly jobless claims and the JOLTS data. If quits start falling and layoffs rise, that's a sign the labor market is cooling. But if wage growth stays hot, the Fed will have to acknowledge that the neutral rate might be higher than they've been assuming. Luna: And the next FOMC meeting is in June. Do we expect any change? Lucas: No change is the consensus. But the statement will be closely read for any shift in language about inflation. If they say 'elevated' instead of 'persistent,' that's a signal that they're starting to worry about growth more than prices. Luna: We'll be watching. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to you for listening.