‘TRUMP’S 3PC TARGET QUITE CHALLENGING’
Productivity growth needs to jump to 2pc from 0.5pc, warns Yellen
FEDERAL Reserve (Fed) chair Janet Yellen warned on Thursday that the Trump administration’s target of three per cent growth would be “quite challenging” to meet.
President Donald Trump had promised during last year’s campaign to push the growth rate to four per cent, but administration officials have since lowered the goal to three per cent, acknowledging that it will take time to accomplish.
But Yellen, calling it “very disappointing”, cautioned that the US economy’s potential to grow was estimated at two per cent.
Asked if it would be possible to reach three per cent over five years, Yellen said: “I think it would be quite challenging”.
She said such a high growth rate would require accelerating productivity growth to two per cent from the current 0.5 per cent, a big jump since increases of only a few tenths of a point are considered significant.
A three per cent growth rate “would be wonderful if you can accomplish it. I would love to see it”, Yellen told the Senate Banking Committee on the second day of her semi-annual testimony on monetary policy.
It could be her last time as Fed chair if President Donald Trump decides not to reappoint her for a second four-year term when the current one expires on February 3 next year.
Yellen highlighted the factors holding down productivity growth, which is related to the difficulty companies report finding qualified workers, stressing the need to focus on worker training and education.
In what may have been a first for usually dry monetary policy discussions, Yellen warned that the opioid crisis was having an impact of the US economy, removing men in their prime from the workforce.
“Many individuals with less education are finding it difficult to be placed in jobs that are middle income jobs,” said Yellen.
“Unfortunately, this is likely tied to the opioid crisis. We’ve even seen an increase in death rates due to deaths of despair, suicides, drugs.”
While declining to offer specific policy prescriptions, Yellen agreed that some “distortions” in the tax code were also holding back productivity growth.
“Appropriately designed tax reform could have favourable effect on productivity. Obviously, it depends on the details,” she said.
Worker training, increasing public and private investment, and research and development also could boost the economy’s efficiency and “potential to grow,” Yellen said.
With the unemployment rate near its historic low at just 4.4 per cent, Yellen said she expected wages to begin to rise, which in turn would push prices higher.
But inflation remains below the Fed’s two per cent target at 1.4 per cent, a fact that has baffled economists given the strong labour market.