US economy needs a boost from govt: Fed
FEDERAL Reserve vice chair Stanley Fischer said that slow US growth is hampering the Fed’s plan to raise interest rates, arguing the government needs to boost the economy.
A below-par reading on manufacturing in New York offset news that overall factory production grew for the third time in four months.
While investors globally expect US interest rates will rise by the end of the year, the figures tempered expectations about the pace of rises after December.
Mr Fischer said interest rates would likely be suppressed by several factors, including weak economic growth at home and abroad and low corporate investment.
The news added to downward pressure on the dollar, which fell against the yen, the euro and even the pound in New York. And while it edged back against the yen in Asia yesterday, it continued to struggle against the euro and the pound.
Amid worries that interest rates have been too low for too long, Mr Fischer noted that people think the Fed can simply raise its benchmark shortterm rate to push up long-term rates more broadly.
“It is not that simple,” he said in a speech to the Economic Club of New York on October 17.
With the Fed expected to raise the federal funds rate in December, Mr Fischer cited key factors outside the central bank’s control – from demographics to technological innovation – that limit the ability of monetary policy to enhance and shape economic growth.
He said low productivity growth, the increasing numbers of Americans retiring from the workforce, low corporate investment and slow international economic growth are all working, against Fed policy, to dampen US economic growth.
“In summary, a variety of factors have been holding down interest rates and may continue to do so for some time,” he said. “But economic policy can help offset the forces driving down longer-run equilibrium interest rates.
“A combination of more encouragement for private investment, improved public infrastructure, better education, and more effective regulation is likely to promote faster growth of productivity and living standards.”
Mr Fischer said persistent low rates are a worrying problem, noting they signal that US long-run growth prospects could be “dim”.
In addition, he said, low rates make the economy more vulnerable to shocks that can push it into recession, and give the Fed little room to manoeuvre to offset that. –
Stanley Fischer says the Fed has several factors to consider.