Chicago Fed President: "Rate Hikes Needed If Productivity Expectations Overheat"

Warning Against Early Rate Cuts
Seven Rate Hikes in One Year Starting in 1994
"Greenspan Also Warned Against Excessive Optimism"

On May 6 (local time), Austan Goolsbee, President of the Federal Reserve Bank of Chicago, warned against arguments for an early interest rate cut based on productivity improvements driven by artificial intelligence (AI). He stated that if the market excessively prices in expectations for future growth before actual productivity gains materialize, this could instead trigger inflation and asset market overheating, possibly requiring an interest rate hike.

During a panel discussion at the Milken Institute Global Conference held in Los Angeles that day, President Goolsbee addressed the Federal Reserve's response to rapid productivity improvements, stating, "It depends greatly on whether productivity gains have occurred unexpectedly, or if they are merely anticipated for the future."

Austan Goolsbee, President of the Federal Reserve Bank of Chicago. Photo by AFP Yonhap News

He explained that if productivity gains occur unexpectedly, it is likely to suppress inflation, making a rate cut possible. On the other hand, if productivity gains are only expected, the resulting additional investment and spending could fuel inflation, necessitating higher interest rates.

In recent months, economic officials from the U.S. administration under President Donald Trump have drawn attention by arguing that productivity improvements from AI will enable faster economic growth without causing inflation.

This references the mid-1990s, when, despite falling unemployment and a robust economy, then-Fed Chairman Alan Greenspan refrained from raising interest rates, citing productivity gains from IT and internet innovation. Kevin Warsh, the next Fed Chair, has also advocated for low interest rates, echoing this perspective.

However, President Goolsbee pointed out that in the 1990s, Chairman Greenspan maintained relatively stable interest rates based on the judgment that productivity improvements from technological innovation—before these gains were reflected in the data—would increase corporate profits and employment without stimulating inflation.

Nevertheless, as productivity gains accelerated and investment and market overheating grew, Greenspan warned against excessive optimism, and the Fed sharply raised its benchmark interest rate.

In fact, in February 1994, the Fed raised its benchmark rate from 3.00% to 3.25%, and over the next year, it increased rates seven times to reach 6.00% by February 1995. During this period, bond prices plunged so sharply that it was referred to as a "massacre."

President Goolsbee cited increased consumer spending driven by stock market returns and expanded capital investment due to rising market values, emphasizing that the Federal Reserve must pay attention to economic activity driven by assumptions about future growth.

He stated, "We must continue to closely monitor the degree of forecasts and expectations for the coming surge in productivity," adding, "The greater the hype, the more we will have to raise interest rates to prevent the economy from overheating."

This content was produced with the assistance of AI translation services.