Top economist Diane Swonk: Jerome Powell risks losing the Fed’s credibility on a gamble over AI and immigration

Federal Reserve Chair Jerome Powell warned Wednesday afternoon that the U.S. labor market may be significantly weaker than the official data suggest. But according to KPMG chief economist Diane Swonk, the Fed may be drawing the wrong conclusion—and in doing so, risks undermining its hard-won credibility on fighting inflation.

In a new analysis shared with Fortune, Swonk argues that Powell is treating the slowdown in hiring as a sign of weakening demand that must be offset with lower interest rates. But if that weakness is being driven instead by structural forces—specifically, AI adoption and sharp declines in immigration—then cutting rates won’t fix the underlying problem and could worsen inflation.

“Powell risks the Fed’s inflation-fighting credibility if the weakness in employment is due more to AI and curbs in immigration than weak demand,” Swonk wrote.

That warning comes after one of the most contentious Federal Open Market Committee meetings in years. The Fed cut rates by a quarter point for the third meeting in a row, taking the federal funds rate down to 3.5%–3.75%, but the vote fractured the committee. Swonk notes it was the first time since 2019 that there were three dissents, and they came “in opposite directions.”

Governor Stephen Miran—currently on leave from the White House Council of Economic Advisers—voted for a half-point cut, while Kansas City ...