In the grand scheme of things, lending support to the argument that US monetary policy is sufficiently restrictive is the rise in US productivity. This should help sustain the downtrend in the Fed’s favourite inflation gauge, the core personal consumption expenditure (PCE) index, towards the official 2.0% target.
At its meeting on 1 May, the US Federal Reserve kept its benchmark overnight interest rate unchanged in the current 5.25 – 5.50%, where it has been since July 2023.
In the post-meeting press conference Chair Powell opined that monetary policy will, over time, be sufficiently restrictive to bring US inflation back to target. He pushed back against the suggestion that the next move could be an interest rate hike, emphasizing in the post-meeting press conference that the policy choice was between leaving official rates on hold and cutting them.
Data published on 2 May showed that US nonfarm productivity, which measures hourly output per worker, increased at a 0.3% annualised rate in the first quarter of 2024 after rising at a 3.5% pace in the October-December period.
The sharp slowing in US productivity growth in the first quarter of 2024, resulted in a surge in labour costs. Nonetheless, the overall growth trend in US worker productivity remains solid.
Strong US productivity meant that workers benefited from healthy wage gains without employers having to pass on the cost to consumers, at least to a large degree, since they were producing enough in various industries and services to cover for the higher labour costs.
The recent jump in US productivity comes after a massive fiscal stimulus centered on green industry, a frenzied period of rehiring and a surge in new business formation in homeworking hotspots.
