Chicago Federal Reserve Bank President Austan Goolsbee cautioned that policymakers should not reflexively cut interest rates simply because productivity growth is accelerating, as such a phenomenon can sometimes increase inflation.
In prepared remarks released ahead of a panel discussion at the Milken Institute Global Conference on Wednesday, Goolsbee stated that the Fed’s reaction to faster productivity growth "depends heavily on whether the productivity growth comes as a surprise or is expected to continue in the future."
He explained that in the first scenario, inflation may remain under control, allowing for lower interest rates. In the latter scenario, however, faster productivity growth could actually push inflation higher, potentially requiring higher interest rates.
The topic has gained increasing attention in recent months, as economic officials from the Trump administration have argued that faster productivity growth driven by artificial intelligence could allow the economy to grow more rapidly without fueling inflation. Kevin Warsh, nominated by Trump to serve as the next Fed chair, has expressed similar views and called for lower interest rates.
Goolsbee referenced changes in productivity growth during the 1990s and how the Fed, then led by Chair Alan Greenspan, responded.
At that time, before faster productivity growth was evident in the data, Greenspan correctly judged that such growth was boosting corporate profits and employment without a corresponding rise in inflation. Under his leadership, the Fed kept interest rates relatively stable.
But by the end of the decade, productivity gains had become clear and spurred large-scale investment. Greenspan warned of market overheating, and the Fed raised interest rates significantly.
Goolsbee emphasized that the Fed must carefully assess economic activity driven by expectations of future growth, pointing to increased consumer spending and capital investment fueled by rising stock market valuations.
He added, "We also need to pay close attention to forecasts and expectations about how much of the productivity surge is still to come. The higher the expectations, the more likely it is that interest rates will need to rise to prevent the economy from overheating."
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