Fed Shouldn't View Productivity as an Exogenous Factor

The Federal Reserve has an opportunity to test a hypothesis critical to the health of the U.S. economy: Can persistently loose monetary policy boost the pace of productivity growth? Sadly, for now, an adherence to a strict Phillips curve framework for the economy and fear of financial instability will prevent the Fed from venturing down this path.

Chair Janet Yellen gave a speech last fall detailing a potential agenda for macroeconomic researchers. Included in the speech was the proposition that the Fed should run a “high-pressure economy” as a possible avenue to boost employment and productivity growth. Initial media reports speculated that Yellen was laying the groundwork to back down from expected rate hikes. These reports were erroneous, as history has proven. Yellen wanted only to plant the seeds of a research agenda, not change the Fed’s policy path.