Fed officials cautious on rising productivity's role in easing inflation

Federal Reserve officials said recent productivity gains, including hopes tied to AI, are encouraging but too uncertain to justify lowering interest rates now; they expect policy to remain near the current 3.50%-3.75% range while inflation stays above target.

Federal Reserve officials this week said recent rises in productivity are encouraging but are not yet a reason to loosen monetary policy. They emphasized that it is too early to build higher productivity into the Fed’s outlook for returning inflation to the 2% target. The Fed’s policy rate remains at 3.50%-3.75%, and officials signaled they see little reason to cut rates in the near term. The discussion has been prompted by a 4.9% year-over-year jump in productivity for the third quarter and by expectations of further gains from artificial intelligence investments. Key facts: - Fed officials said higher productivity is promising but not yet a confirmed path to lower inflation. - The policy rate is 3.50%-3.75% and officials indicated monetary policy is likely to remain on hold for now. - Underlying consumer inflation was reported at 2.6% year-over-year in December, while food and housing costs showed notable strength. - Productivity rose 4.9% year-over-year in the third quarter, which pushed unit labor costs down to nearly 2% on the same basis. - Some Trump administration officials urged cuts to interest rates citing productivity trends, but Fed leaders including Alberto Musalem and John Williams said it was premature to change policy. Summary: Fed officials said recent productivity gains alone do not yet justify easing policy, leaving the central bank inclined to hold rates steady while inflation remains above target. The Fed is not expected to cut rates at its January 27-28 meeting, and officials said decisions will remain data-dependent through the remainder of Chair Jerome Powell’s current term.