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Weak economy is keeping interest rates low

By dailymail / Published on Monday, 31 Jul 2017 14:23 PM / No Comments

Interest rates aren’t just low because the Federal Reserve is keeping them there but rather because of a weak economy and other factors, the central bank’s vice chairman said Monday.

In a speech delivered in Rio de Janeiro, Stanley Fischer said low rates send ” a powerful signal that the growth potential of the economy may be limited.”

At a time when President Donald Trump is discussing raising the pace of the U.S. economy to at least 3 percent growth, Fischer cited Congressional Budget Office estimates that potential is probably closer to 1.5 percent.

“Slower growth can both boost saving and depress investment. As households revise down their expectations for future income growth, they become less likely to borrow and more likely to save,” Fischer said, according to his prepared remarks. “Likewise, slower growth diminishes the number of business opportunities that can be profitably undertaken, weighing on investment

The Fed lowered its benchmark rate to near-zero during the financial crisis and kept it there for seven years. Since December 2015, the central bank has hiked the funds rate four times, but government bond yields remain low and financial conditions have eased rather than tightened as might be expected during a hiking cycle.

In addition, the Fed plans on unwinding its $4.5 trillion balance sheet of bonds it accrued during its efforts to stimulate the economy and rescue the housing market from its worst downturn since the Great Depression.

Fischer said the current slow-growth environment has its roots in poor productivity, demographics and weak business investment.

Moving past this point will require more than loose monetary policy. He also called for more aggressive fiscal measures to boost output.

“Policies to boost productivity growth and the longer-run potential of the economy are more likely to be found in effective fiscal and regulatory measures than in central bank actions,” Fischer said. “This statement is true not only in the United States, but also around the globe.”