The world has witnessed many technological revolutions in past centuries. While they rewrote the way we function and conduct our lives, Artificial Intelligence (AI) promises deeper, consequential changes.

The truth is that AI has come to occupy a central space in every sphere of human activity. From a hi-tech specialty tool, it has transmogrified into a deep foundational motive power across the global economy.

However, the focus of this piece is the impact of AI on central bank policy and their ability to manage monetary policy.  But before we get to the brasstacks, a quick summary of the magnitude of investments and impact of AI would be in order.

According to a Golman Sachs study, AI has the potential to raise global GDP by 7% over the coming decade. This has attracted investments of over a trillion dollars AI infrastructure in  just over two years.

Just seven companies, a.k.a “the magnificent 7” or the Mag-7, now dominate the US stock market - Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA), Meta Platforms (META), and Tesla (TSLA)

The ‘Mag-7’ stocks had a combined market cap of $23.8 trillion as of September 2026. Together, they made up over one-third of the S&P 500. All seven companies have grown significantly over the last decade, and each is now worth more than $1 trillion.

Beneath this euphoric optimism lies a huge policy challenge for central banks around the world.

Governor Lisa D Cook of the Federal Reserve has recently pointed out that Artificial intelligence is one of the factors that have contributed to high inflation in the US. Dr Cook further points out that “some of these steep price increases reflect a shift in demand toward AI-related sectors rather than an increase in economy-wide demand. When a surge in demand is concentrated in one sector, goods and services in that sector can get pushed onto a steep part of their supply curve”. 

A study on AI’s impact has also highlighted the policy challenges. In a recent bulletin published by the Basel, Switzerland headquartered Bank for International Settlements (BIS), the authors Aldasoro et al assess how the AI boom is shaping near-term macroeconomic dynamics and the attendant implications for monetary policy and financial stability.

According to the study, AI has the potential to change the way central banks respond to macro-economic changes, watch inflation and set interest rates.

There are four key takeaways from the bulletin.

Firstly, the authors point out that AI is funneling huge investments – in data centers and its infrastructure. The investment volume has crossed over 1% of the GDP in the exposed economies. The capital expenditure is largely funded by debt markets and private credit.

Second, these forces are reshaping trade and equity markets, generating sizeable terms-of-trade and wealth effects that differ markedly across countries.

The bulletin points out further that the widely claimed boost to productivity remains unclear. This has also brought with it some early signs of softening of the labor market, particularly in economies most exposed to AI.

Finaly, they point out that by moving supply and demand at the same time, “ AI blurs the cyclical signals on which central banks rely, thereby complicating monetary policy calibration. “

It is interesting to note that the BIS study points out that the productivity gains from AI are mixed and uneven across sectors. The benefits accrue narrowly to advanced economies that are already heavily invested in AI while emerging economies face uneven benefits.

The study also raises important concerns about financial stability.

AI is already disrupting business models in key sectors and has negatively impacted their stock prices (e.g. SaaS). In other sectors, an export boom risks generating asset price bubbles.

Further, the high expectations that AI could bring sweeping positive transformations in the economy could be too optimistic to be true. As of now at least, the study points out, the benefits are uneven. Thus, the overly optimistic sentiments could spur excessive investments, misallocation of resources and poor credit quality across the spectrum. As would be then expected, a correction in asset prices could be very painful and weaken aggregate demand.

The BIS bulletin, authored by Aldasoro et al, is Central Bank speak for the impending uncertainty that AI has spawned. It is disconcerting to note that “the magnificent 7” or just seven companies not only dominate the investments but also control almost everything associated with Artificial Intelligence (AI). Significantly, the narratives on the pros and cons of AI too emanate from them.

Dr Cook’s observations as well as the BIS study should serve as a wake-up call, not because AI is inherently malefic or inflationary. They point to the compulsive necessity of a rational analytical perspective of the impact and benefits of AI. A cautious outlook, rather than an over-enthusiastic sentiment would be the need of the hour.

Obviously, “the Mag-7” stand to harvest humongous profits from their investments in the AI ecosystem – from data centers to agentic AI and power infrastructures - that have been built all over the globe. But for the rest, The Federal Reserve and BIS study are red flags that need to be heeded.

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