Federal Reserve Vice Chair Stanley Fischer says Fed needs help to hike, as a number of forces restricting the hike are not in control of the central bank. Will the rate hike happen in 2016?
6 October, AtoZForex – According to the Federal Reserve (Fed) Vice Chairman Stanley Fischer, the proof that the natural interest rate has dropped to low levels could signal the stagnation of the economy in the low-growth track that could prove hard to avoid.
Fed needs help to hike?
Mr. Fischer additionally mentioned that he is worried about the shifts in world savings and investment models that may have dragged down the natural rate could “prove to be quite persistent…We could be stuck in a new longer-run equilibrium characterized by sluggish growth.” Stanley Fischer added that the as the possible outcome, central bankers could see a future with the short-term interest rates being set by policymakers never get far above zero. Also, according to the Vice Chairman of Fed:
“Ultralow interest rates may reflect more than just cyclical forces,” Mr. Fischer stated, but “be yet another indication that the economy’s growth potential may have dimmed considerably.”
Yet, Mr. Fischer’s comments did not reflect the possible Fed agenda on the interest rates or monetary policy.
What is the natural rate?
It is not the first time the Fed authorities are openly expressing their worries about an underlying decrease in US economic potential. But what is this natural rate?
A lot of research has been done about the so-called natural rate of interest in the past years. Sometimes the natural interest rate also called neutral or equilibrium rate. Yet, in many ways, it can be perceived just as a concept, as it is not an interest rate set by Fed, but only an approximation of the underlying rate that would keep the level of prices stable in the times of the growth in the economy.
The current Fed’s conclusion about the natural rate being low has taken a lot of developments into consideration. The obvious implication for Fed is that the central bank now cannot shift its short-term federal assets very high before the policy becomes too tight.
How to solve this problem?
Mr. Fischer stated that the “silver lining” could be a possibility that better policy could boost the natural rate and the US potential. This would involve not only the monetary policy, but also “some combination of improved public infrastructure, better education, more improvement for private investment, and more effective regulation,” according to Vice Chairman of Fed.
Moreover, Mr. Fischer considered help from other branches of the US government as an option. Even though many think that the Fed could just simply raise the rates, the central bank is actually restricted by forces beyond its control.
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