Axios Macro

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Fed chair Jerome Powell tried to chill expectations of an imminent interest rate cut during yesterday's press conference. Today, we explain one reason why the central bank wants "greater confidence" that inflation is declining: the risk that the recent productivity boom might not stick.

Situational awareness: The Bank of England held interest rates steady again, but offered the first signal of rate cuts this year as inflation slows and the economy stagnates.

Today's newsletter, edited by Kate Marino and copy edited by Katie Lewis, is 649 words, a 2½-minute read.

1 big thing: The puzzle keeping the Fed hesitant

Fed chair jerome Powell speaks at a press conference

Photo: Julia Nikhinson/AFP via Getty Images

Productivity growth was a key factor in why inflation has receded so dramatically with very little economic pain — a combination few envisioned.

Why it matters: The problem is that the productivity bump might be fleeting. That explains, at least in part, why Powell shot down the possibility of an interest rate cut in March.

The big picture: America appears to be in the midst of a productivity boom, the likes of which hasn't been seen in years. It's allowed inflation to keep coming down alongside rapid growth, solid wage gains and a thriving labor market.

  • But Powell appears skeptical that those productivity gains will be sustained, a big risk to what has so far been an economic success story.
  • If it turns out that the 2023 surge in productivity growth was a one-time event tied to the bounce back from the pandemic, then keeping up inflation progress will require growth to slow down in 2024.

By the numbers: U.S. workers have been producing more for each hour worked — a phenomenon that continued in the final months of last year.

  • In the fourth quarter, labor productivity rose 3.2%, the Labor Department said this morning — the third consecutive period in which it topped 3%.

What they're saying: "My guess is that we may shake out and be back where we were," Powell said in yesterday's press conference, referring to recent productivity gains.

  • "I think we're basically in the throes of getting through the pandemic economy," he added.

The intrigue: Powell was fairly explicit that the Fed probably won't cut rates in March. That gives the central bank more time to assess whether inflation continues on a downward path, even if factors boosting productivity fade.

  • At some point, supply-side factors may not have much more to give: Supply chains will fully normalize, and worker reentry into the labor force will slow.
  • It is worth noting, though, that this phenomenon has lasted longer than many — including some Fed officials — have expected.
  • And in the long run, workers may generate more output thanks to technology (more on that below).

The bottom line: If sustained, the productivity boom "is a potential game-changer for the American economy," RSM chief economist Joe Brusuelas said this morning.

  • If the productivity boom doesn't last, "then the economy is running the risk of cyclically overheating once the temporary increase in supply due to the easing of bottlenecks" comes to an end, BofA global economist Claudio Irigoyen wrote in a note.

2. Powell's AI skepticism

Illustration of a brain made out of glowing lines and nodules composed of quarters.

Illustration: Aïda Amer/Axios

We've written much here about the potential for generative artificial intelligence to fuel future productivity growth. It was clear in his news conference that Powell does not see AI as a near-term panacea for productivity.

What they're saying: "Will it be the case that we come out of this more productive … on a sustained basis? I don't know," Powell mused.

  • "AI — artificial intelligence, generative — maybe [will increase productivity], but probably not in the short run. Probably, maybe in the longer run."

State of play: One of the live debates among business executives and leading thinkers on AI is how rapidly these technological advances will allow companies to do more with fewer person-hours of labor.

  • Some past major advances, from electricity in the early 20th century to information technology advances of the 1980s, took years or decades to translate into broad-based productivity gains.
  • It sounds as if Powell is in show-me mode on a tech-driven productivity bump in the near term — not ruling it out, but certainly not counting on it arriving.

Flashback: Fed governor Lisa Cook gave a speech last September arguing for "cautious optimism" on AI's economic implications.

Yes, but: Federal Reserve officials don't have special insight into how these technologies will or won't affect macroeconomic variables, and their policies have little impact on productivity gains.

  • In other words, they're observing events unfold in this area just like everyone else.