A bold warning from a top economist: Jerome Powell may be risking the Fed’s hard-won credibility by anchoring policy on a theory about AI and immigration rather than on the true driver of the labor market. Diane Swonk, chief economist at KPMG, argues in a fresh analysis that Powell could be misreading a slowdown in hiring as a demand-driven weakness that warrants lower interest rates. If, however, the slowdown stems from structural shifts—primarily automation through AI and tighter immigration—the proposed rate cuts would not address the root cause and might even fuel inflation down the line.
Swonk writes that Powell’s framing could jeopardize the Fed’s inflation-fighting credibility if the job-market weakness is driven more by AI implementation and immigration restrictions than by slack demand. This perspective comes on the heels of a notably contentious Federal Open Market Committee meeting, where the Fed trimmed rates by a quarter point for the third straight time, pushing the target range to 3.5%–3.75%. The decision was not unanimous, marking the first three-dissent split since 2019 in opposing directions.
In Swonk’s view, the dissenting votes underscored a broader split: Governor Stephen Miran called for a larger half-point cut, while Kansas City Fed President Jeff Schmid and Chicago Fed President Austan Goolsbee preferred holding rates steady. The Fed’s statement iterations signaled a cautious pause: the committee would weigh incoming data, the evolving outlook, and risk balance before any further moves. Powell echoed that sentiment, stressing the economy’s evolution would guide policy and noting that data distorted by a government shutdown should be treated with some skepticism.
The central tension, Swonk argues, is Powell’s emphasis on anticipated downward revisions to employment. If those revisions reflect automation-driven displacement or a shrinking labor force due to immigration policy, then monetary policy tools like rate cuts won’t fix the underlying dynamics and could even push inflation higher.
Powell acknowledged at the conference that AI could be part of the cooling labor-market story, citing examples from major employers such as Amazon that have reduced hiring or laid off workers in tandem with automation. Yet he warned that it’s premature to deem AI a major factor, and he cautioned that the wave of technological change may ultimately create as many jobs as it replaces.
Another consideration Swonk highlights is the labor supply’s sharp decline, linked to reduced immigration and participation rates. She warns that misreading the trend could be dangerous, especially given the fiscal environment. Tax-cut expansions from the previous year are poised to produce record-high refunds early in 2026, a windfall she says could further entrench inflation much as amplified spending did in the post-pandemic period.
At the same time, the national debt picture is tightening: projections show the federal debt surpassing GDP for the first time since World War II, a level of issuance that may overwhelm bond markets.
Swonk also points to credibility risks inside the Fed itself. With six participants favoring a pause, and markets discounting Powell’s hawkish framing, the Fed’s credibility could erode if investors expect more cuts after the meeting. Powell now appears, in Swonk’s view, to be among the more dovish voices on the committee, which raises questions about policy direction if the administration later elevates a chair aligned with Miran’s aggressive easing approach.
Looking ahead, Swonk anticipates a pause early next year. But she warns that if inflation stubbornly refuses to ease, bond-market participants could grow wary of ongoing rate cuts.
