AI is quietly reshaping the cost base of the US economy by replacing labour and making processes more efficient. In services in particular, this is reducing unit labour costs and easing inflationary pressures. The bond market, however, has yet to fully recognise the policy room this creates for the Federal Reserve.
According to Patrick Artus, senior economic adviser at Ossiam (Natixis IM), this scenario is still largely absent from market pricing. “The three-month eurodollar contract, which reflects market expectations for future short-term interest rates, suggests investors expect rates to remain broadly stable through to the end of 2028.”
That view is consistent with the current market focus on rising inflation driven by higher energy prices following the war in Iran. These price shocks are seen as a reason for the Fed to remain cautious about cutting rates.
Artus, however, is looking beyond this short-term volatility. “If AI has a lasting disinflationary effect, we are more likely to enter a period of lower inflation. In that case, an earlier and broader downward adjustment in rates across the curve becomes more likely.”
He argued that this is already leading to a “decoupling”, in which robust economic growth coincides with weakening employment. “Service-based economies are facing significant job losses due to AI, particularly in sectors such as retail, financial services, business services and telecoms,” Artus said. “Employment in these sectors stagnated or declined in 2025. Despite rising wages, unit costs have increased by only 0.5 percent year-on-year since the second quarter of 2025.”
This trend reflects the growing adoption of AI. In services in particular, it is leading to substantial job losses. But the pressure on the labour market is not confined to these sectors. “If industrial robots are considered part of AI, employment in manufacturing is also under pressure. The number of robots per worker is especially high in countries such as South Korea, Japan and China.”
This points to a fundamental tension: while AI-driven substitution of labour leads to higher unemployment, it also boosts profits. AI therefore represents a risk for workers but an opportunity for investors. Large-scale layoffs could also weigh on consumption, particularly in countries such as the United States, where redistributive policies are relatively limited.
Artus expects that an end to the war in Iran, combined with further easing in inflation, would give the Fed scope to loosen policy. Rising unemployment would reinforce the disinflationary trend. “If this scenario materialises, the Fed will be able to cut rates,” he said, “as its two objectives—price stability and low unemployment—would no longer be in conflict.”
Lower rates, shifting allocation
Artus’s view is broadly in line with that of Kevin Warsh, the prospective next Fed chair, who also sees scope for AI-driven productivity gains to structurally reduce inflation.
At the same time, the Fed is facing political pressure. President Trump has long pushed for lower interest rates, not least given the high level of public debt and associated borrowing costs. Treasury Secretary Scott Bessent last week said that he understands the Fed’s preference to wait for more data before cutting rates—pointing to a “higher-for-longer” stance—but nonetheless sees rate cuts as ultimately unavoidable.
As long as energy prices remain elevated, the Fed is likely to proceed cautiously. But once that pressure eases and inflation declines further, room for policy easing will emerge. The rise of AI therefore points to lower bond yields and higher corporate profits.
From disinflation to deflation
Initially, bondholders benefit from falling interest rates. However, if disinflation turns into deflation, this poses a risk for debt-driven economies. The real burden of debt increases, consumers postpone spending, and profit margins come under pressure. Japan remains the classic example: since the 1990s, the country has struggled with prolonged deflation and weak growth, leading to subdued consumption, low investment and persistent pressure on corporate earnings.
In such a scenario, the Fed would also lose its main policy tool, as rates cannot fall much further. “For investors, this implies that equities become more attractive over the medium term, while bonds lose relative appeal,” Artus said.
Europe lags behind
This dynamic is not global. Europe is clearly lagging behind the United States. According to Artus, only 13 percent of European companies currently use AI, compared with far broader adoption in the US. America accounts for roughly 70 percent of global AI computing capacity, while Europe lags at around 4 percent. As a result, productivity gains—and their disinflationary effects—remain limited in the eurozone for now.