Musalem: How Should the Promise of Higher Productivity Growth Change the Reality of Monetary Policy Today?

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Thank you for the opportunity to speak today. I’d like to discuss one of the most fundamental challenges we face as economic policymakers: understanding structural economic change as it happens. There are many types of structural change that create such a challenge, including changes in the famous star variables like the natural rates of unemployment and interest. But today, I’ll focus on shifts in the trend rate of productivity growth. I’ll boil this topic down to a simple two-part question: how does the economy respond to a shift in the rate of productivity growth, and what does it mean for monetary policy? It may seem like a basic question that should have been long settled by now. But the further you delve into trying to answer it, the more nuanced it becomes. This question is especially timely today because of all the attention on artificial intelligence and its potential to spur a productivity boom. But this is not our first productivity growth rodeo. Thankfully, history provides important lessons for us to learn from. Think back to the 1970s, when the United States experienced a pronounced productivity slowdown following a quarter century of remarkable postwar growth. This was followed by an acceleration beginning in the mid-1990s, which itself reversed in the mid-2000s. These episodes weren’t minor statistical curiosities—they fundamentally reshaped the macroeconomic landscape. The productivity slowdown of the 1970s contributed to stagflation. And the productivity boom of the late 1990s and early 2000s was a contributing factor to that decade’s economic prosperity with low in Fed's Williams does not comment on near-term monetary policy outlook.

Ms Schnabel started her presentation by noting that since the Governing Council's previous monetary policy meeting on 18-19 March 2026, movements in euro area financial markets had continued to be driven by developments in the Middle East and their impact on energy prices. Amid elevated volatility, markets continued to expect the oil price shock to be persistent. Although upside risks had moderated, oil was priced significantly higher, over an extended period of time, than it had been before the start of the war in the Middle East. As a result, markets continued to price in a notable and sustained inflationary impact. Inflation fixings had increased further for both 2026 and 2027. This suggested that investors anticipated some indirect or second-round effects extending beyond the first year of the conflict, before inflation was expected to return to the target of 2% in 2028. At the same time, markets continued to expect the economy to be relatively resilient. Prices of risk assets, including equities, as well as sovereign and corporate bond spreads, and the exchange rate of the euro had moved back towards the levels observed prior to the conflict. Earnings expectations had been revised up since the beginning of the war, which was consistent with the view that the impact on economic growth would be short-lived. At the same time, there had been negative surprises in macroeconomic data for the euro area. Therefore, buoyant risk asset markets, which were hovering near all-time highs, might indicate some investor complacency given the size and persistence of the energy price shock. With inflation still perceived as the dominant risk, investors were pricing in cumulative policy rate hikes by the ECB of 73 basis points in 2026. Overall, financial conditions had eased since the Governing Council’s previous monetary policy meeting, driven mainly by strong risk asset markets, but they remained somewhat tighter than before the war. ECB ACCOUNTS: UPSIDE RISKS TO INFLATION AND DOWNSIDE RISKS TO GROWTH HAD INTENSIFIED. ECB ACCOUNTS: WEAKNESS COULD PERSIST WELL BEYOND THE END OF THE CONFLICT Just in | ECB Reports: Consumer side shows no signs of second-round effects as wage negotiations are yet to occur. ECB REPORT SHOWS IT'S STILL TOO EARLY TO SEE SECOND-ROUND EFFECTS ON CONSUMERS, AS WAGE NEGOTIATIONS ARE REQUIRED. ECB MEMBERS MIGHT HAVE SUPPORTED HIGHER RATES.