With the U.S. in what one might call a “productivity recession” – given back-to-back quarters of negative productivity growth – Fed Chairman Yellen remains hopeful that productivity growth will return to its long-term trend, while allowing that “it’s conceivable that… [it] disappoints.” Of course, the Fed could also gauge productivity growth prospects by examining real interest rates, which reflect long-term U.S. growth prospects. In theory, yields would rise if long-term growth was expected to be higher, implying higher returns on investment, spurring further investment; and increasing future earnings, incentivizing households to consume more and save less.

Our latest research examines the historical relationship between U.S. real interest rates and productivity growth, complementing our earlier work on trend GDP growth. Indeed, it seems that, while remaining hopeful, the Fed is also becoming more realistic about productivity growth prospects.