Banking and Finance Law Daily Wrap Up, FINANCIAL TECHNOLOGY—Fed Vice Chair Barr analyzes two hypotheticals as to GenAI progress, (Feb 19, 2025)

By Patricia K. Ruiz, J.D.

Barr focused on GenAI, given its significant growth and integration into economic activity in just a few short years.

Federal Reserve Board Vice Chair Michael S. Barr outlined in remarks at the Council on Foreign Relations two hypothetical scenarios for the impact of generative AI (GenAI) and the implications for businesses, regulators, and society. Barr explored a scenario in which GenAI experiences incremental progress with widespread productivity gains and a scenario in which GenAI spurs rapid transformative change.

Benefits, adoption of GenAI. GenAI significantly enhances productivity across a range of knowledge-based activities and can be used by people without coding skills to generate content. GenAI will likely become a “general purpose technology,” with widespread adoption, continuous improvement, and productivity enhancements to a wide range of sectors across the economy, Barr explained, noting that survey evidence shows much faster rates of consumer adoption of GenAI than we experienced for the personal computer or the internet. Barr stated, while actual deployment of GenAI is limited to some business functions, businesses in almost every sector are experimenting with or considering how to make use of the technology. Firms are also exploring Agentic AI, which are GenAI systems that are able to proactively pursue goals by generating innovative solutions and acting upon them at speed and scale, Barr said. Thinking through hypothetical scenarios can help widen our lens to a range of possible outcomes and provide a framework for assessing the balance between benefits and risks, Barr explained.

Incremental progress with widespread productivity gains. In the first scenario, GenAI primarily augments work in existing processes and leads to steady and widespread productivity gains; however, it does not fundamentally unlock new capabilities or transform the economy. GenAI tools enhance efficiency, enabling more personalized solutions across industries, in ways that have incremental but meaningful effects on people’s lives. Health care sees significant improvements as GenAI reduces administrative burdens, assists with diagnostics, and personalizes treatment plans based on real-time patient data; medicines and other treatments are developed at a faster pace. In education, GenAI alleviates administrative tasks for teachers, allowing them to tailor lessons to individual students and allowing students to learn by doing. In manufacturing, GenAI-optimized supply chains anticipate and adjust more quickly to disruptions, and current manufacturing processes are refined through virtual iteration. In materials science, GenAI drives experimentation to accelerate the discovery of new materials, spurring advances in industries from construction to electronics. The financial sector experiences similar productivity gains.

In this scenario, the impact to society would be incrementally positive, with productivity rising and the economy growing at a faster pace. The impact on the labor force would depend on the industry and the nature of the job, and society would need to account for the possible effects of AI, including worker displacement. While it is possible that the expected value creation from GenAI was overhyped, with society anticipating transformative breakthroughs rather than incremental productivity gains, market corrections may be triggered for firms that heavily invested in the technology. In this incremental scenario, Barr explained, GenAI may magnify both the vulnerabilities and sources of resilience that already exist in the financial system. However, Barr said, as long as financial regulators, enterprise risk managers, and other charged with managing downside risks prioritize efforts to keep pace with the evolving financial ecosystem, there is nothing to suggest a wholesale transformation of the balance of risks.

Transformative change. In a more dramatic hypothetical scenario, GenAI adoption extends beyond improving on what we currently do, providing new expertise and capabilities that have transformative effects on the economy and society, with humans deploying imagination and creativity to deploy intelligent GenAI systems to make rapid breakthroughs in biotechnology, robotics, and energy, fundamentally reshaping existing industries and creating new ones. In this scenario, GenAI is no longer only a tool for scientists to analyze data—GenAI becomes the scientist, directing the research. In this scenario, Barr said, GenAI applications in health care do not simply improve how care is delivered but also enable therapies that target genetic mutations and cure diseases previously considered incurable. Manufacturing evolves to create GenAI-driven robotic factories, and materials science is transformed through the discovery of programmable materials and self-healing substances, which reshape construction, technology, and consumer goods. GenAI optimizes fusion energy research, expediting the shift to sustainable energy sources, helps create the next generation of quantum computing, and, in effect, improves its own energy sources and computing capabilities.

In this scenario, finance looks radically different than it does today. Individuals with access to hyper-personalized financial planning and businesses with innovative products and services connect seamlessly with one another through near-frictionless or novel forms of financial intermediation; trading strategies and risk-management practices are boosted by greater GenAI-based analytic tools with dynamic real-time access to an enormous knowledge base. Barr noted that, while this scenario is more speculative and is accompanied by a far greater degree of uncertainty, it is important to consider, due to the opportunities for human advancement and welfare. We would need to fundamentally reimagine how the economy is structured, Barr explained.

In this world, some workers may see their current jobs disappearing or see their own work transformed and have many more choices about the work they do. The radically changing nature of labor would require society to have broader conversations about how to organize the economy, wrestling with how to navigate major economic shifts in a way that recognizes the impact on the human condition. In the competitive landscape, rewards for businesses would be distributed more unevenly at first, with these market advantages lessening over time if the right regulatory environment supports competitive market dynamics. However, Barr said, “[H]istory suggests caution in this regard; a handful of players may dominate.”

Moving forward. Barr highlighted ways in which society can help to harness the potential benefits of GenAI and minimize its risks. First, financial institutions and the Federal Reserve System should consider investing sufficient resources in understanding GenAI technology, incorporating it into their workflows where appropriate and training staff on how to use the technology responsibly and effectively. The financial regulatory community should employ agility and flexibility in its approach the changing landscape. Governments, private industry, and research institutions should collaborate to ensure GenAI systems are not weaponized in catastrophic ways. The focus should remain on responsible AI research and development, and safeguards should be implemented against misuse. We should also be attuned to the impact of GenAI on economic and political institutions, Barr said, to avoid gains being realized by only a small group, with the rest left behind.

Barr also stressed the importance of AI governance, keeping in mind that the goal of technology is to improve the human condition. Thus, we should ensure we think of GenAI as enhancing and not replacing humans, setting up best practices and cultural norms to that end. Additionally, Barr stressed that we need to be attuned to the risk in finance, as the attributes that make GenAI attractive also present risk. Use of GenAI can lead to herding behavior and the concentration of risk, potentially amplifying market volatility. We should also monitor how introduction of such technology changes the banking landscape, Barr said.

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