Austan Goolsbee, President of the Federal Reserve Bank of Chicago, spoke at the 2026 Milken Institute Global Conference in California on Wednesday. He said the Federal Reserve continues to debate how rising productivity affects inflation.
He noted that if households expect future gains in income and wealth from higher productivity, they may increase spending. This could add to inflation.
Productivity Inflation Debate
He added that productivity may affect inflation and interest rates in either direction. The outcome depends on how these forces develop.
The Federal Reserve’s active debate on whether rising productivity will fuel or tame inflation creates significant uncertainty for the market. We saw Q1 2026 nonfarm productivity surge by an annualized 3.5%, yet the April CPI report came in stubbornly high at 3.1%, making the Fed’s next move a coin toss. This situation implies that upcoming economic data releases, particularly the next inflation and jobs reports, will trigger outsized market reactions.
Given this uncertainty, we anticipate a rise in market volatility. The CBOE Volatility Index (VIX), which has been hovering near 17, is likely to spike above 20 as traders reposition ahead of the next Fed meeting. For derivative traders, this suggests that buying VIX call options or using other long-volatility instruments could be an effective way to profit from the expected increase in market chop.
Interest rate derivative markets are pricing in this indecision, with Fed funds futures showing nearly equal odds of a hold versus a rate hike by late summer. A prudent strategy is to use options that benefit from a large move in either direction, such as a straddle or strangle on SOFR futures. This allows a position to be profitable whether the Fed is forced to hike rates to fight inflation or holds steady because productivity is keeping a lid on prices.
Market Hedging Strategies
From an equity standpoint, the two potential outcomes create a sharp divergence for stock performance. We saw during the 2022-2024 period how sensitive markets were to Fed policy pivots, and this environment feels similar. Hedging long portfolios with out-of-the-money put options on indices like the S&P 500 is a cost-effective form of insurance against an unexpectedly hawkish Fed decision in the coming weeks.
Looking back, the late 1990s showed that a productivity boom can occur without runaway inflation, but the supply chain shocks of 2022 taught us a different lesson. The latest wage growth data, which came in at a 4.2% annual rate, supports the argument that higher productivity is currently being channeled into higher consumer demand and price pressures. This suggests the risk is tilted towards an inflationary outcome that the market may not be fully pricing in.
