Federal Reserve Governor Michael Barr underscored the critical necessity of establishing clear guardrails to mitigate potential risks as the financial sector increasingly integrates artificial intelligence (AI) into its core operations. Addressing the Singapore FinTech Festival, Barr emphasized the crucial balance regulators must strike between fostering innovation and preserving financial stability, with the ultimate goal of ensuring AI contributes positively to long-term economic growth and productivity.

Barr voiced particular concern regarding the United States, fearing that the pendulum might swing too far towards deregulation, thus lowering guardrails in a manner that could expose the financial system to undue risk. He observed the swift adoption of AI across various facets of financial businesses, including customer service, document summarization, sales, marketing, and public relations. However, he specifically highlighted that the exploration of generative AI for "core functions" within firms demands "great care" due to its heightened potential for risk.

Policymakers, according to Barr, have a responsibility to prevent the technology from introducing hazards such as market manipulation, collusion, or increased volatility. He articulated a scenario where AI systems could engage in trading with one another in a way that amplifies market instability or even precipitates systemic risk across the financial system. Furthermore, he cautioned against the possibility of AI being trained on skewed data or employing biased techniques, which could inadvertently embed new prejudices within the financial system.

Beyond immediate risks, Barr delved into the broader economic transformations AI could instigate. He posited a range of outcomes, from AI merely augmenting existing tasks and roles to a more profound, transformative impact where work and leisure undergo radical changes, leading to significant efficiency gains and the emergence of new business models. He stressed the importance of tracking these diverse scenarios and the intermediate steps between them.

In his prepared remarks, Barr cited a New York Fed survey indicating that AI has prompted employers to reduce their hiring plans, suggesting this development might be contributing to a slowdown in job creation. He also pointed to the substantial economic change, including potential productivity gains, that trillions of dollars in planned capital investment into data centers could drive. Barr concluded by stating that such significant changes, as he had discussed previously, could also influence the conduct of monetary policy.