Central bankers push public spending to boost economy

US business investment seen as flagging

While markets wait for Janet Yellen’s latest message about the direction of monetary policy, the Federal Reserve chief and her colleagues already have one for politicians: the US economy needs more public spending to shift into higher gear.

In the past few weeks, Yellen and three of the Fed’s other four Washington- based governors have called in speeches and Congressional hearings for government infrastructure spending and other efforts to counter weak growth, sagging productivity improvements, and lagging business investment.

The Fed has no direct influence over fiscal policy and its officials traditionally refrain from discussing it in detail. Having its top officials speak in one voice sends a strong signal to the next president and Congress about the limits they face in setting monetary policy and what is needed to improve the economy’s prospects.

Therein lies a troubling feature of the recovery – business investment has fallen below levels in prior years and companies seem to have stopped responding to low borrowing costs.

As a share of gross domestic product ( GDP), US annual business investment since 2008 has averaged nearly a full percentage point below the previous decade’s average, government data shows. Reuters calculations indicate the investment shortfall has blown a hole in annual GDP that has grown to as much as 1 trillion dollars a year compared with what it would have been if the previous trend continued.

Little suggests a rebound any time soon. Fixed business investment has fallen in three successive quarters as a share of GDP.

Companies have run up share buybacks to record levels of around half a trillion dollars a year, and held onto record amounts of cash.

Based on data collected from chief financial officers, the internal rate of return needed to justify capital projects has “hovered near 15 percent for decades,” and barely budged even as global interest rates have fallen. Such targets made sense during spells of strong growth, but may be inconsistent with the current low- growth, low- interest rate environment, and hold back corporate spending, the Fed economists argue.

That challenges the core monetary policy notion that low short- term rates spur investment by making long- term returns more attractive.