Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / How the AI Economy Is Reshaping Blue-Collar Wages
Transcript
- Lucas: There's a headline from earlier this week that I think cuts through a lot of noise about the Fed's current predicament: 'The AI economy is rewriting the American Dream — and blue-collar workers are poised to win.' That's from CNBC, and it's not just hype. Luna: I saw that. It pairs well with the consumer sentiment hitting a record low. So are we saying the blue-collar worker is feeling less of the pinch, or is this something longer-term? Lucas: I think it's structural. You look at the job numbers, and the wage growth is bifurcating. For roles like electricians, machinists, warehouse technicians — the kind you can't offshore and you can't fully automate — wages are up sharply. Meanwhile, some white-collar coding roles are seeing downward pressure because AI tools are eating into entry-level tasks. Luna: So the AI economy is actually boosting demand for hands-on, in-person work. That runs counter to the narrative we heard a year ago about AI replacing everyone. Lucas: Exactly. And this matters for the Fed because it changes the inflation picture. Core CPI came in at 335.4 for April, up from 334.17. That's still sticky. And the ten-year breakeven inflation rate ticked up to 2.40. The market is saying inflation expectations are creeping higher, not lower. Luna: Right. And the Fed's effective rate is 3.64. They've been on hold since the spring. If blue-collar wages continue to rise, that puts upward pressure on services inflation — haircuts, restaurant meals, home repairs — because those workers have more spending power. Lucas: That's the mechanism Chair Warsh is wrestling with. The bond market has already priced in higher inflation expectations. The ten-year yield is at 4.56, the thirty-year at 5.06. The yield curve is still inverted, but the long end feels the pressure. Luna: Let's get specific on those blue-collar wage numbers. What are we actually seeing? Lucas: So for production and nonsupervisory workers — that's about 80 percent of the workforce — average hourly earnings are up about 5.2 percent year-over-year. But for the bottom quartile, it's even higher. According to the Atlanta Fed's wage tracker, the lowest income quartile has seen wage growth above 6 percent for several months. Luna: And that's exactly the group that spends a higher share of their income on goods and services. So their wage gains feed directly into demand. Lucas: Right. Meanwhile, the upper quartile — managers, software developers, analysts — their wage growth is closer to 3 percent. And some of those roles are actually seeing nominal cuts or stagnation because AI is automating parts of their workflow. Luna: So we have a two-speed labor market. And the Fed's models — which usually look at aggregate wage growth — might miss that bifurcation. Lucas: That's the key insight. If you're only looking at the average, it looks like wages are growing around 4 percent. That's above the Fed's 2 percent inflation target, but not alarmingly so. But the distribution matters. The workers getting the biggest raises are also the ones with the highest marginal propensity to consume. Luna: And they're also the ones who face the most inflation in the categories that are hardest to substitute — rent, gas, groceries. Lucas: So the Fed is in a tough spot. They see core inflation still above 3 percent on a PCE basis. The core PCE price index is at 129.3, up from 128.9. But if they raise rates, they risk crushing the very sectors where wage growth is finally lifting people up. Luna: And Chair Warsh has been pretty hawkish in his public comments. He's talked about the need to 'stay the course' until inflation is sustainably at target. But the data isn't cooperating. Lucas: He's got the bond vigilantes breathing down his neck. The ten-year yield climbed about 80 basis points since the start of the year. And the small-cap index, the Russell 2000, is up 3.4 percent in just the last five days. That suggests investors are betting on a 'blue-collar boom' regardless of what the Fed does. Luna: Which is interesting because small caps are more exposed to the domestic economy and to rising wages. If those wages are rising because of productivity gains from AI adoption, then it's actually good for profits. Lucas: That's the optimistic case. AI tools are making blue-collar workers more productive — think of a warehouse worker using ai guided picking systems or a machinist using predictive maintenance software. That boosts their output per hour, which allows employers to pay more without raising prices as much. Luna: But in the short term, those investments cost money. And the Fed's high rate environment makes borrowing for that equipment more expensive. Lucas: Right. So there's a tension. Higher rates slow capital spending, which could delay the very productivity gains that would make higher wages non-inflationary. It's a classic chicken and egg. Luna: And the consumer sentiment data shows that people are feeling the pinch. Even if wages are rising, inflation expectations are up. The breakeven rate at 2.40 is above the Fed's target. Lucas: That's the real danger. If inflation expectations become unanchored, the Fed will have to act more aggressively. But for now, they're stuck at 3.64, watching and waiting. Luna: It feels like the Fed is in a 'damned if you do, damned if you don't' situation. If they raise, they risk a recession. If they hold, inflation might stay sticky. Lucas: And if they cut, the bond market will punish them. So the path of least resistance is to just sit tight. But the longer they sit, the more the economy adjusts around that rate. Luna: Talking about this kind of structural shift — it makes you appreciate how much a show like this relies on digging into the data and the stories behind it. If walking through the economy with us has made something click for you, and you'd like to help keep this ad-free, listener support is what makes that possible. You can find us at buy me a coffee dot com slash fexingo. No pressure, just if it's something you believe in. Lucas: Yeah, we really appreciate that. And honestly, it's conversations like this — where we connect wage trends to monetary policy — that wouldn't happen without that support. Luna: So back to the wage bifurcation. I'm curious: is this ai driven blue-collar boom geographically concentrated? Or is it spreading beyond the usual tech hubs? Lucas: Good question. The data suggests it's spreading. The Federal Reserve's Beige Book from earlier this month noted that manufacturing and logistics hubs in the Midwest and Southeast are seeing some of the strongest wage gains. Places like Nashville, Greenville, Columbus — not just San Francisco or Seattle. Luna: That makes sense. Those are areas with big distribution centers and advanced manufacturing. They're adopting AI in warehousing and predictive maintenance. Lucas: Exactly. And the twist is that this could actually help ease the housing affordability crisis in the long run, because workers don't have to move to expensive coastal cities to get a good wage. Luna: But in the short run, the Fed is still looking at the same inflation data. The core PCE number for March was 129.3, up from 128.9. That's not a dramatic acceleration, but it's not decelerating either. Lucas: Right. And the next FOMC meeting is in June. I think the market is pricing in no change. But the tone of the statement and the dot plot will be telling. Luna: So what are you watching for? What would change the narrative? Lucas: If we see the breakeven inflation rate push above, say, 2.50 — that's a red flag. Also, if the monthly core CPI prints above 0.3 percent for a couple of months. That would signal that the blue-collar wage pressures are translating into persistent inflation. Luna: And if that happens, do you think Warsh would actually raise rates, or would he try to talk down expectations? Lucas: I think he'd raise. He's made it clear that his credibility is on the line. The bond market is testing him every day. If he backs down now, the vigilantes will push the ten-year to 5 percent and do the tightening for him. Luna: So we're in a waiting game. The AI economy is reshaping the labor market, but the Fed is still playing catch-up with the data. Lucas: Exactly. And that's the story of 2026 so far. The economy is evolving structurally, but monetary policy is still looking at backward-looking indicators. The question is whether the Fed can adapt fast enough, or whether the bond market will force their hand.