Fed expects GDP growth in the US to pick up

Federal Reserve vice chairman Stanley Fischer said the US economy is close to the central bank's goals and he expects growth to pick up in the future.

“We are close to our targets,” Mr Fischer yesterday. “Looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes,” he added, without giving his views on the rate outlook. He also called for more effective fiscal and regulatory policies to help boost productivity.

US central bankers are grappling with the question of how fast they should raise interest rates in an economy that has shown modest growth, strong job gains, and only moderate increases in inflation from low levels.

The central bank boosted borrowing costs for the first time in seven years in December, and has left the benchmark lending rate unchanged at all five of its meetings so far this year.

Several shocks

Mr Fischer said the behaviour of employment has been “remarkably resilient” even as the economy has passed through several shocks, while GDP growth has been “mediocre at best”.

While the economy has done “less well” in moving toward the Fed’s 2 per cent inflation target, Mr Fischer said the central bank’s preferred price benchmark, which excludes food and energy costs, at 1.6 per cent was “within hailing distance of 2 per cent”.

He spent much of his speech to the Aspen Institute in Colorado discussing the slowdown in worker output per hour, or productivity, noting that it increased 1.25 per cent per year on average from 2006 to 2015, compared with 2.5 per cent from 1949 to 2005.

“A 1.25 percentage point slowdown in productivity growth is a massive change, one that, if it were to persist, would have wide-ranging consequences for employment, wage growth, and economic policy more broadly,” he said.

Mr Fischer said monetary policy isn’t equipped to boost productivity growth. He said the “key” to boosting output per hour “is more likely to be found in effective fiscal and regulatory policies,” citing improved public infrastructure, better education, and incentives for private investment.

Fed officials raised the benchmark lending rate to a range of 0.25 to 0.5 percent in December. In June, their median estimate predicted at least two more hikes this year. They left rates unchanged in July and minutes from that meeting showed officials were split between those who preferred to wait because inflation remained benign, and others who pointed to reduced labour market slack.

Fed officials next meet on September 20-21st. Investors will listen closely for additional clues on timing when Fed chairwoman Janet Yellen speaks on Friday at an annual symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming.

– Bloomberg