Fed's Bostic: Even with rising productivity, Fed needs to keep focus on inflation; responding to short-run issues could cause bigger problems over time

Fed's Bostic: Even with rising productivity, Fed needs to keep focus on inflation; responding to short-run issues could cause bigger problems over time

Fed’s Bostic: Productivity Gains No Excuse for Easing Inflation Focus

Atlanta Fed President Raphael Bostic emphasized on February 20 that the Federal Reserve must remain vigilant on inflation despite rising productivity and economic resilience, warning that short-term policy accommodations could exacerbate long-term risks. Speaking at an event in Birmingham, Alabama, Bostic noted that full-year GDP growth of 2.2%—above his estimated 1.8% long-run potential— signals a "pretty strong number" that risks fueling persistent inflation. With inflation hovering near 3%, he argued that the Fed should maintain tight monetary policy to avoid entrenching higher price pressures.

Bostic’s remarks highlight an emerging debate within the Fed about whether technological advancements, particularly AI-driven productivity gains, are altering the economy’s growth trajectory. While he acknowledged that AI could boost potential output, he cautioned that growth above the economy’s sustainable capacity risks reigniting inflation. “What that means is that we have to worry about the implications for prices on a strong economy,” he stated. This stance contrasts with some colleagues, including new Fed chair nominee Kevin Warsh, who argue that a productivity boom could enable faster growth without inflationary consequences.

Bostic also addressed the risks of premature policy easing. “If we start to see inflation moving the wrong way,” he said during a University of Miami Business School discussion, "or even stalling out at an elevated level, we’ll have to consider whether policy is sufficiently restrictive." Recent data shows inflation at 2.8% annually, with core measures at 3.1%, underscoring the Fed’s cautious approach.

The Fed’s data-dependent strategy remains central to its decision-making. Bostic stressed that while productivity gains could support disinflation, rising demand—such as from AI-related investments—might temporarily offset these benefits. He reiterated that the Fed’s commitment to its 2% inflation target remains unwavering, even as it navigates evolving economic dynamics.

With the Fed’s policy framework balancing growth and price stability, Bostic’s comments reinforce the central bank’s readiness to adjust rates based on incoming data, prioritizing long-term inflation control over short-term gains.