Yellen eyes public spending to plug $1-trillion gap

The US economy needs more public spending to shift into higher gear. In the past few weeks, Federal Reserve chief Janet Y ellen( pictured) 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.

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 fifth member has supported the idea in the past.

The Fed has no direct influence over fiscal policy and its officials traditionally refrain from discussing it in detail. Having its top officials — from Yellen to former investment banker and Bush administration official Jerome Powell — 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.

The Fed’s annual conference in Jackson Hole, Wyoming, where Yellen speaks on Friday, is due to focus on how to improve central banks’ “toolkit”, but the unanimous message from the Fed’s top policymakers is that those tools are not enough.

“Monetary policy is not well equipped to address longterm issues like the slowdown in productivity growth,” Fed vice-chair Stanley Fischer said on Sunday. He said it was up to the administration to invest more in infrastructure and education.

Behind Fischer’s statement 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, 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 one 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. Researchers and analysts blame the slide on everything from doubts about future economic growth to distortions caused by Fed policy itself in helping boost the value of financial assets.

Companies have run up share buybacks to record levels of around half a trillion dollars a year, and held onto record amounts of cash, despite cheap financing that should in theory spur long-term investment.