NEW YORK, May 28 - Federal Reserve Bank of New York President John Williams warned on Thursday that detecting fundamental changes in productivity in real time is a challenging task. In the text of a speech prepared for the Reykjavík Economic Conference in Iceland, Williams emphasized the difficulty policymakers face in distinguishing temporary from permanent shifts.
"Real-time identification of structural change is extraordinarily difficult, and expectations of future growth tend to adjust gradually to changes in underlying productivity growth," Williams said in his prepared remarks. He argued that, because perceptions of growth evolve slowly, an early-stage change in productivity is likely to be interpreted by the economy as a temporary increase rather than a lasting one.
"As a result, in the initial stages following a shift, the economy is likely to behave more like a temporary increase in productivity growth than a permanent one," Williams said.
Williams also pointed out a link between higher productivity and the level of real interest rates. In his prepared text he noted that "a shift higher in productivity can raise the real interest rate that prevails in the economy."
The prepared remarks did not include commentary on the near-term stance of monetary policy or on the immediate economic outlook. Williams limited his prepared text to the challenges of identifying structural productivity changes and their potential implications for the real interest rate.
The speech came amid recent data showing accelerated levels of productivity in the United States and an ongoing debate over why productivity has picked up and what that could mean for the Federal Reserve's policy stance going forward. Williams' comments focused on the measurement and interpretation problem rather than offering a forecast or policy guidance.
By highlighting that expectations of future growth "tend to adjust gradually," Williams underscored the potential for a time lag between a structural change in productivity and the way the broader economy and markets respond. That lag, he suggested, could cause an initial economic reaction that mirrors a short-lived productivity gain instead of a permanent shift.
Summary: Williams cautioned that recognizing structural productivity shifts in real time is exceptionally hard, that expectations adapt slowly, and that a productivity increase can push up the real interest rate. He did not address immediate policy moves in his prepared remarks, and his comments arrive amid debate over recent productivity gains in the U.S.