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Powell On Productivity Forecasts and Neutral Rate Estimates

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  • Estimating longer-term productivity is very, very uncertain. People lowered their longer run growth expectations of 1.8%, something below 2%, with expectations that productivity growth would be 1-1.5%. That’s a pretty good place to be. We’ve had higher productivity growth recently and the question is whether it’s going to be sustained. It is productivity growth that lifts all boats. It’s unknowable what we need to see to get 1-1.5% productivity. It’s too soon for AI to be affecting the productivity numbers but the logic is that it could increase productivity.
  • Neutral rate estimates: The question of what will be the equilibrium neutral interest rate going forward doesn’t really matter for policy today. We’re really asking about once the pandemic is well and truly behind us and we’re well into the AI investment boom and the effects of AI, and what it will look like. It doesn’t really matter that much for getting inflation down to 2% while keeping the economy growing and the labor market strong.
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  • Estimating longer-term productivity is very, very uncertain. People lowered their longer run growth expectations of 1.8%, something below 2%, with expectations that productivity growth would be 1-1.5%. That’s a pretty good place to be. We’ve had higher productivity growth recently and the question is whether it’s going to be sustained. It is productivity growth that lifts all boats. It’s unknowable what we need to see to get 1-1.5% productivity. It’s too soon for AI to be affecting the productivity numbers but the logic is that it could increase productivity.
  • Neutral rate estimates: The question of what will be the equilibrium neutral interest rate going forward doesn’t really matter for policy today. We’re really asking about once the pandemic is well and truly behind us and we’re well into the AI investment boom and the effects of AI, and what it will look like. It doesn’t really matter that much for getting inflation down to 2% while keeping the economy growing and the labor market strong.