Fed exec sees ‘modest’ interest hike in December
At Concord forum, Jeffrey Fuhrer voices concerns over productivity declines with economy in a ‘new normal’
An official of the Federal Reserve Bank of Boston added to the growing expectation that there will be an interest rate hike this month.
Speaking Wednesday at the Greater Concord Chamber of Commerce’s economic forum at the Holiday Inn in Concord, Jeffrey Fuhrer, executive vice president of the Fed Reserve Bank in Boston, said he anticipates a “modest” interest rate increase in December, but he added it’s unlikely that there will be drastic interest rate hikes on the horizon.
In his talk, Fuhrer described the current state of the economy as a “new normal.” While the economy has added an average of 18,000 new jobs per month over the last few months, unemployment is hovering around 5 percent and inflation is nearing its 2 percent target, many Americans may not be feeling the effects of the post-recession recovery because of a low productivity rate exemplifies how the U.S. is recovering more slowly in terms of its GDP growth than in any previous recovery.
For over 100 years, U.S. productivity has increased by an average of 2 percent. This year, the average is about 0.5 percent.
“That’s partly about productivity,” said Fuhrer. “That may change if productivity grows, but at the moment, that is likely to be the case where we have slightly lower interest rates on average than we did prior to the recession.”
Economists are also closely watching the labor force participation rate. Since the 1980s and late 1990s in particular, the participation rate has been declining due to the country’s aging population. However, over the past year, the labor force participation rate has been increasing.
“We’ve had good employment growth during that period and we’ve had more people enter the labor force at the same time, so that’s roughly offset the good effect of increased employment,” said Fuhrer, adding, “we actually like to see people re-entering the labor force because it’s a sign the labor market is healthy enough for people to look for and in most cases get jobs.”
Education a priority
A key question is whether the unemployment rate will continue to decline, putting pressure on wages or creating a bubble reflected in the financial markets.
“We probably have a little bit more room to go. I think we have somewhat stimulative monetary policy for a while that would maintain some growth, that will continue to produce some pretty healthy growth, bring some people back into the labor force,” said Fuhrer. “Over time, that’s likely to move the unemployment rate lower, and there’s a limit to that. We’re not at that limit now, I don’t think, but we’re close enough that we need to be watching that.”
Part of the slow growth of the economy can be attributed to less risk-taking on the part of companies and investors, which the Fed hopes to be temporary, said Fuhrer.
New innovations are also important to growth, he said.
“There are areas where we could make incredible progress,” said Fuhrer, who pointed to the energy sector. “The person who comes up with the scalable, economically viable energy source that replaces fossil fuels is going to make trillions of dollars, but more importantly is going to transform the way we do everything not just in this country but in all developed countries around the world. And when that happens, that is going to be a big change in all of the economies around the world.”
Increasing the number of college-educated Americans is also key to increasing productivity and drastically changing statewide and national economics.
Fuhrer argued that increasing that number should be a national priority with bipartisan support.
“We have lots of people in the country and in the state of New Hampshire who are not as well educated. They don’t have the skills that they will need to actively participate in the economy moving forward, said Fuhrer. “We have got to do something about that.”