Fischer: Lagging Productivity, Labor Force Holding Natural Rates Down

In a speech before the Economic Club of New York today, Federal Reserve Vice Chairman Stanley Fischer pointed to four factors that are contributing to the unusually and persistently low interest rate environment in the U.S. Fischer argued that lower productivity and labor force growth, an aging population, slow investment and a trend of slow international economic growth are currently driving abnormally low levels of natural short- and long-term interest rates.

“A variety of factors have been holding down interest rates and may continue to do so for some time,” Fischer said. “But economic policy can help offset the forces driving down longer-run equilibrium interest rates.” He added that “some combination of more encouragement for private investment, improved public infrastructure, better education, and more effective regulation is likely to promote faster growth of productivity and living standards,” and reduce the likelihood of interest rates dipping below zero.

Such factors limit the ability of policymakers to move rates higher, he added. “Changes in factors over which the Federal Reserve has little influence — such as technological innovation and demographics — are important factors contributing to both short- and long-term interest rates being so low at present.”