Betting on Productivity: The Fed's Not-So-Risk-Free Gamble

Federal Reserve Chair Jerome Powell suggests higher productivity as a potential solution to balance economic growth, inflation, and the labor market. While productivity boosts growth, it remains unpredictable, and reliance on technologies like AI could lead to significant societal and employment challenges.

Federal Reserve Chair Jerome Powell acknowledged on Wednesday the absence of a risk-free approach for the central bank as it attempts to lower stubbornly high inflation while supporting a faltering labor market. However, Powell pointed to higher productivity as a potential solution to achieving solid growth amidst economic challenges.

Higher productivity, which indicates increased output per labor hour, helps in controlling inflation through lower unit labor costs, while simultaneously driving wage growth and boosting economic activities. The Federal Reserve's favorable outlook for 2026, suggesting only one more rate cut, is largely based on this factor.

Nevertheless, this reliance on productivity, particularly driven by AI, poses potential risks if the anticipated economic impact does not manifest. Concerns continue over potential job losses and societal impacts that could arise if AI's adoption is limited. The Fed remains flexible, awaiting more data to shape its future policy decisions.

(With inputs from agencies.)