Stanley Fischer Sees Low Growth Ahead
The United States is on the brink of long-term stagnation, where low interest rates and sluggish economic growth become permanent fixtures of the economy. Or at least that’s according to Federal Reserve Vice Chairman Stanley Fischer.
While speaking to a group of central bankers in New York, Fischer voiced his concern that the global economy was stuck on an irreversible path.
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The Fed vice chair said the current low interest rate environment could “prove to be quite persistent” and that “we could be stuck in a new longer-run equilibrium characterized by sluggish growth.” (Source: “Fed’s Fischer says near-zero rates, QE may be the future,” CNBC, October 6, 2016.)
As the second in command at the Fed, Stanley Fischer has a bird’s eye view over structural changes in the U.S. economy. He also is a seasoned economist, who undoubtedly keeps up with the most recent research, which is probably what motivated this thinking.
“Ultralow interest rates may reflect more than just cyclical forces,” Fischer said. He indicated that they actually could be “yet another indication that the economy’s growth potential may have dimmed considerably.”
There has been vigorous debate in the economics community about the efficacy of monetary policy in a low-interest environment. The arguments are complex, but the natural rate of interest is a particularly sore sticking point.
Economists cannot seem to agree on what the appropriate number is to restore economic growth to its potential. All they know is that the economy is performing below full capacity. There are some, led by ex-Treasury Secretary Lawrence Summers, who believe this is the new normal for the U.S. economy.
They call it “secular stagnation.” It is the idea that growth in advanced countries is set to plateau and that very little can be done to fix it; not through monetary policy, not through fiscal policy.
Vice Chair Fischer obviously shares some of those views, if not all.
His notion of a long-term pattern marked by sluggish growth is traced from the idea of secular stagnation. More to the point, if Fischer does think that low interest rates are helping to stimulate the economy, it could mean he might advocate for a rate hike at December’s meeting of the Federal Open Market Committee (FOMC).
