It's so exciting to be here with Governor Waller. We both flew in from Washington, D.C. to have a chat with you all in the present. One thing I've noticed is that just like in Washington, if you walk around in Delhi, the big conversation is AI, which we are going to continue talking about. Governor Waller, you have made a lot of comments in the last couple of years about the benefits of AI, including a productivity boom, contributing to GDP growth, seeing living standards rise. And that's all talking about the United States. I'd love to hear from you how you see the impact of AI in our economy go into the rest of the world, especially emerging markets like India.
Yeah. I mean, the way I think about AI is first, there are those who build the AI tools and the models. Then there are those who supply all the imports to build that. That would be data centers, chips, all that. And then third, that's the people who actually use the models. Now, clearly, when it comes to building the models, the US is the dominant country. China is there as well in terms of providing the imports. A lot of that's Taiwan, South Korea, producing the imports, data centers, they're all over the world. They're not just located in the US. And then, of course, the users are anybody that wants to use it for work. Now, there's a very high correlation between GDP per capita and AI use in people's work. So that's kind of one of the things that people are, I think, a little concerned about is it's not even across the world in terms of how AI is used, and that means it's going to have productivity differences if it's not actually used. So you'll see more potentially widening gaps in GDP per capita because of this. But I think it's an amazing technology. I really do think I'm not a pessimist. I don't believe AI is going to be the end of the human race in the next two years or anything like that, but it is a tool. And even within the Federal Reserve, that's what I tell all of our employees. We're going to train you to do this because we want you to be more productive. If I was going to replace you with AI, I wouldn't waste a penny training you. That would be a waste of money. So it really is a tool that I expect all of our employees to use. So that's kind of the basic global picture of how I think the whole AI world works. Europe, for example, doesn't produce much of AI or imports, but they're big users of it, and it's already kind of widely spread throughout the business sector and community.
Let's talk about the payoffs. You say you're an optimist. You're not worried about, you know, the human race. When are we going to see some of these benefits? The productivity boom, the increase in our wages, inflation being reined in. Those things haven't really turned up for the everyday person, right?
That's often the case that when you have big technological changes, this is what economists know is you don't typically see the productivity gains for years. A big part is firms have to figure out what am I using this for? How am I going to actually increase productivity? They're not really sure. And so there's a lot of trial and error and a lot of experimentation. But then you start realizing where it really does have its impact. I mean, I'm telling you, if anybody does any coding, this stuff is amazing. I mean, it's just shocking how good it is. So in terms of coding, yeah, I mean, if you were a coder, your job is going to be fundamentally changed. It doesn't mean you're going to lose your job. It's just you're going to do a different job than what you were doing before. Things that you couldn't do because you were too busy doing basic coding. You're going to be able to now expand what you're doing in terms of the production of your output. So, I think it's just going to be a while before firms start figuring out how to actually do this. And you may or you may not see it in terms of this is one of the measurement things I've thought about. Suppose I can do the same amount of work faster. So instead of five days I get it done in three days. Maybe I take all that time and just go have more leisure. My output is not any higher per a given year. It's just I've got more time to consume my leisure and enjoy my life. That still means it's still good for welfare, even if you don't see a big increase in GDP per capita. So you either have to rethink, is it do we measure GDP or productivity per unit of time as opposed to, you know, quarterly? It's now down to like days. So you have to kind of think about that. And then just in terms of productivity, there's a lot of things this technology is just going to make your life better, even if it doesn't show up in your work productivity. I always like to point out Google Maps is an amazing invention. I don't use it to increase my productivity. It helps me get around in cities where I'm an hour visiting and I don't get lost. That doesn't show up in the GDP numbers, but that makes my life a lot better. So I always try to tell people, technology can just make your life better, or it could actually increase productivity, how much output you produce.
One thing that's clear to measure is inflation. And right now, the narrative in the United States and in other parts of the world is an affordability crisis. There is definitely an impulse that's coming from AI-related impacts on the economy in the short term. When do you see the AI hit to inflation dissipating in the US?
Yeah, I mean, the whole build out, obviously, if you're building out several trillion dollars of investment in AI and you have to buy all that stuff and your demand is perfectly inelastic, you'll pay whatever price. If you're one of the hyperscalers, you're going to bid up the price of all semiconductors of all type, and that's going to spill over to anybody else who uses those products. And that's what we're starting to see in the US. We're starting to see AI having a spreading out of inflation, because it's just increasing demand for everything else. Now down the road, when this stuff is done and they've kind of built it out, that kind of demand pressure goes away. And then you hopefully will start seeing all the supply effects, which means we can produce more output faster and at a lower price. So it's one of these two stage things. Demand is going to be especially the size of the investment. I mean this is shocking how much is being spent on this compared to any other point in history. And so you're going to see these price pressures early on. How long are they going to last? It could last anywhere from 2 to 3 years, given how much they've committed already to spend out in the future. Now, if all of that falls off, if suddenly there's a pull back or you can't meet this build out, you can't do it. That'll put a check on prices. But the benefits on inflation down the road are there down the road. As far as I'm concerned, they're still a few years out, a few years off.
Is there any chance that the inflation that's stemming from the AI build out could be embedded in the economy for a longer time?
Yeah. I mean, like I said, it's very specific what it is. It's not like a broad based effect. It spills over to a smaller set of goods than, you know, other things. So and we know that at some point, this huge build out and huge demand is going to, I won't say completely come to an end, but it's going to taper off a lot. And when that happens, we'll see the demand pressure come down. But from all the plans that I'm hearing from the hyperscalers, they're still planning on spending trillions of dollars over the next three years. So this demand pressure may still be there. And we have to just decide how we want to respond to that.
Well, let's talk about the AI build out. There is still a lot of investment that's coming through, a lot of that corporate. A lot of that is being issued in corporate debt. We're seeing a lot of financing to help with the AI build out. And of course, that debt is sensitive to US treasuries. And we've seen yields skyrocket. Global yields are high. Can you talk through a little bit about what you see in US yields, whether that could be longer term, and how much of the global higher yield picture has to do with the narrative in the US and what separates them?
Yeah, I mean, everybody's suddenly paying attention to high yields. And when you look at it, it's not yields have gone up because there is expected higher future inflation that doesn't show up. Inflation expectations are well anchored. So all the build up is not coming from an inflation premium. That's not where it's coming from. So it is a factor of real growth. If you have real growth and real productivity, and these investments are going to pay off, you're willing to pay more in terms of your interest cost. And people know that and they'll ask for it. So real growth has an effect on these real yields. Now on top of that you have general fiscal concerns around the world. All governments are kind of sitting here now. Now at least in advanced countries not such a great state. And we're seeing that in France right now. So some of this is just driving up yields in some countries that aren't necessarily related to the US or maybe some other countries. And then the competition from AI is a serious, serious concern. Because even if the money flows into the US, so demand goes up, but there's inflows from abroad, and that kind of cancels out that price effect. That money is leaving some other country. Their yields are going to go up. So even if you have competition and no inflows in the US, the yields are going to go up. If you have higher demand and yet there's inflows from other countries, you're going to see higher yields in those countries, because the funds are no longer available for those countries to invest in. But the AI build, I think, is definitely having an impact. I mean, if you look at Google issued, I think, a 40 year bond and it was paying 100 basis points over US treasuries. Where do you want to hold 100 basis point premium for a Google bond? That's probably going to pay off. It's not like they're going to probably default. So that is affecting the way people are looking at things. So anyway, that's it.
There's economists who say that the US at least, and maybe the rest of the world is entering a phase of just higher yields and needs to adjust to it. Do you agree with that?
Well, I mean, like I said, if this is all because of higher growth, that's a good thing. I'd rather have higher growth and higher yields than low growth and low yields. And that seems like an obvious one to me. What you get concerned about if it's driven by inflation expectations. Fiscal concerns, which I think is really a problem in France right now. Could be in the US. People are starting to wake up to our fiscal situation is not that good. And then naturally, bondholders are going to demand a higher yield to get them to buy that debt. So, if you're living with higher yields because of higher growth, to me that's a good thing. If you're living with higher yields because of greater fear of inflation, that is not a good outcome.
I want to ask you about the fiscal policy situation and how that affects your role and your work at the Fed. But first, when yields go up, they do tend to do the job a little bit of a rate hike. In the picture that we have now, do you think that that's enough or is there more room for the Federal Reserve to raise interest rates?
Yeah. So I've long argued that the ten year rate is determined by global supply and demand. What I do change in the overnight interest rate on deposits, that's not driving the ten year yield much. So and even if I do it, it's for some short period of time, not ten years out. So I've always viewed the ten year as being driven by global factors, global demand, also supply from the US Treasury. And it's not so much what I do.
So when yields go up, does that going to impact interest sensitive sectors like housing and autos and other things?
