WASHINGTON, May 6 (Reuters) - Rising productivity won't necessarily lower inflation and could actually increase it if businesses and households anticipate future gains and begin to increase spending, leading to higher prices and the possible need for tighter monetary policy, Chicago Federal Reserve President Austan Goolsbee said on Wednesday.
In comments that foreshadow a coming debate with incoming Fed Chair Kevin Warsh, who has argued for the disinflationary impact of higher productivity, Goolsbee said that while the lower inflation argument seems intuitive as companies learn to make more with less, "the implications for what that would mean for interest rates" remain an active area of debate.
"If people expect an increase in productivity coming in the future ... it can change their behavior today," as households, companies and shareholders anticipate rising income and wealth, Goolsbee said in comments prepared for delivery at a Milken Institute conference in Los Angeles. "It can lead to increased spending and potentially overheat the economy before the productivity boom has actually arrived. In that case, the fundamentals suggest rates would need to rise."
"It's critical we be careful about activity driven by assumptions of future growth," he said. "The bigger the hype, the more rates would need to rise to prevent overheating."
Former Fed Chair Alan Greenspan argued against rate hikes in the mid-1990s on the grounds that productivity was improving and would ease price pressures, even if not widely anticipated. Goolsbee, however, noted that by the end of that decade, the U.S. central bank was hiking rates even as the productivity surge was expected to continue.
DEPLOYMENT OF ARTIFICIAL INTELLIGENCE TECHNOLOGY
Productivity currently is expected to continue improving as artificial intelligence technology is deployed across more businesses, but the gains arguably are being realized already in the form of record equity prices that are helping sustain spending among more affluent households.
In testimony during his confirmation hearing before the Senate Banking Committee last month, Warsh was careful not to pin down his views about how improvements in productivity might influence interest rates.
But the former Fed governor said he felt the impact of AI on the economy's productive capacity may end up being far greater than its impact on demand, a view consistent with downward pressure on inflation.
"I don't claim to have perfect knowledge of how any of these are going to go, but I do have an intuition the pace of change is accelerating," Warsh told the lawmakers, and that the impact on the economy's potential "could be considerably bigger" than the influence on demand as firms build new data centers and ramp up use of electricity.
"We don't know that. We can't bank on that," Warsh said. "But considerable work needs to be done by the Federal Reserve in evaluating this productivity wave."
Reporting by Howard Schneider; editing by Paul Simao
