May 14, 2019


Fed's Williams says policymakers need to better prepare for lower interest rate world (Reuters, 5/14/19) 

Lower birthrates are keeping population growth down in the world's wealthier economies and technological advancement has shifted down to more normal levels. Each trend is capping how much economies can grow, Williams said.

The lower growth leads to less investment and aging populations in those advanced economies increases saving. Lower demand for and a higher supply of savings has reduced the "neutral" level of interest rates around the world that would, in theory, not restrict or heat up the economy.

Those factors keep rates close to zero, where they lose their potency to respond to a recession, the economist argued, adding that there is no sign that "neutral" rates will go back to previously normal levels absent a change in demographics or a scientific or technological breakthrough. The Fed has set rates in the United States between 2.25-2.50%, but they are lower and in some cases even negative in places, such as Japan and Europe.

Williams, who earlier in his career was a researcher at the San Francisco Fed, is known for helping develop estimates of what the "neutral" interest rate might be. Now, he is pushing to encode some of that thinking in how the Fed approaches inflation from now on.

As part of a broad policy review, Williams has been advocating for the Fed to systematically respond to periods of tepid inflation by keeping U.S. interest rates "lower for longer."

And technology and consumption taxes will just keep driving prices lower.

Posted by at May 14, 2019 12:02 AM