NEW YORK Oct 17 The U.S. economy may face
longer and deeper recessions in the future if interest rates
remain stuck at current low levels, Fed Vice Chair Stanley
Fischer said on Monday as he mapped out a world in which low
growth hamstrings central banks from effective
Though officials would still have tools such as quantitative
easing and forward guidance if rates remain low, he said, "these
alternatives are not perfect substitutes for conventional
policy. The limitation on monetary policy imposed by low trend
interest rates could therefore lead to longer and deeper
recessions when the economy is hit by negative shocks."
However it is "not that simple" for the Fed to coax interest
rates higher in a world that central bankers increasingly
believe is one where an aging population, weak demand and low
investment may have undercut the country's and indeed the
world's economic potential, Fischer said.
Many of the forces holding down growth, such as
demographics, are beyond the reach of policy. And hopes of
boosting productivity or investment may rest more with other
branches of government that could boost spending at their
discretion, Fischer said.
Fischer's remarks prepared for delivery at the Economic Club
of New York did not touch on current policy or the likelihood of
an interest rate increase at the Fed's November or December
But they offered a more detailed restatement of arguments he
and other Fed officials have made in recent weeks warning that
the current state of affairs may be about as good as it gets.
That line of thinking has become more prevalent among
policymakers, and is consistent with aspects of the "secular
stagnation" theory offered by economists who feel the country's
long-run potential is less than it used to be.
Fischer said he has tried to quantify the implications for
monetary policy, and the results are not encouraging. A decline
in longer-run trend growth in gross domestic product, for
example, may have cut as much as 1.2 percentage points from the
expected long-run federal funds rate.
Demographic trends, weak investment and slower overseas
growth are pulling it down even more.
The closer that long-run rate comes to zero, the less room
policymakers will have in the future to counter any downturn.
(Writing by Howard Schneider in Washington, additional
reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama)