2025 Grey Swans: Central Banks Become Independent (of Humans)
- By Bilal Hafeez
This article is part of Macro Hive’s 2025 Grey Swan series, where we let our imaginations loose to try and predict low-probability, high-impact events that almost no one expects. You can read the full list here.
Time for Policymakers to Delegate?
The last four years have been a torrid time for central banking. The Fed launched its new framework for conducting monetary policy in 2020. It aimed to encourage catch-up inflation, only for the Fed to be blindsided by the largest jump in inflation in decades. The Fed and other central banks were then forced to aggressively hike rates to contain inflation.
Scarred by these experiences, central banks have increasingly given up on their ability to forecast inflation. Instead, they have become reactive to the most recent inflation print. Our Fed LLM Sentiment Index shows Fed hawkishness is almost entirely a function of recent inflation data (Chart 1).
So, why not move to the next step and stop relying on humans to conduct monetary policy? Why not delegate it to AI?
After all, central banks are increasingly using AI in their thinking. For example, the ECB has publicly stated that ‘AI is…increasingly being incorporated into the economic analyses we carry out to help us prepare our monetary policy decisions’. Also, ‘AI could help in areas where central bank communication is key, such as ensuring that policy decisions are well understood and keeping inflation expectations anchored’.
In practice, this means AI could be used to conduct analysis on the economy, understand the impact of policy on inflation, suggest a policy move and then write the communication. What is not to like?
On top of that, politicians could no longer claim that central banks are biased or acted to influence election outcomes – the ultimate independent central bank.
So, let AI do its job, and humans can sit back and enjoy the results.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)