Economists at Deutsche Bank caution that recent improvements in U.S. productivity may not fully alleviate price pressures, particularly given slower population growth and broad tariffs, which could constrain the Federal Reserve’s ability to lower interest rates.
In a note, researchers led by Matthew Luzzetti highlighted that productivity growth over the past two years has marked its strongest expansion since the late 1990s.
“The backdrop of a historically tight labor market in recent years combined with the promise of innovations from the implementation of artificial intelligence supports strong productivity growth ahead,” the Deutsche Bank team wrote.
They drew comparisons to the 1990s, when advances in information and communications technology fueled a productivity boom without triggering inflation.
At that time, then-Fed Chair Alan Greenspan cited productivity gains as justification for avoiding rapid interest rate hikes. The U.S. economy then achieved consistent 4% real GDP growth, “at or below target inflation,” and lower unemployment, according to the researchers.
However, Deutsche Bank noted several factors today are “less supportive” than in the 1990s, including a slowdown in both U.S. and global labor supply. The aging population and stricter immigration policies under President Donald Trump have weighed on labor force participation rates.
Trump’s higher tariffs could also increase inflationary pressures in the near to medium term, as they may “incentivize a shift toward less efficient production.”
“As such, while the labor market and AI backdrop is supportive of continued strong productivity gains, a turn away from globalization could counteract some of these benefits,” the note said. “The benefits to disinflationary pressures could in turn be more limited.”
The researchers advised caution in drawing direct parallels between today and the late 1990s, warning against assuming similar productivity gains would justify a dovish Fed stance.
Earlier this month, the Federal Reserve cut interest rates for the first time since December, citing the need to balance a cooling labor market against persistent inflation. While lower rates can stimulate hiring and investment, they also carry the risk of adding upward pressure on prices.
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