World Economy

US Economy May Exceed Inflation, Job Goals

Total factor productivity averaged just 0.29% in the past 12 quarters.Total factor productivity averaged just 0.29% in the past 12 quarters.

Federal Reserve Vice Chairman Stanley Fischer said the central bank could exceed its goals for inflation and employment as it probes the limits of resource use in the economy.

Fischer said the economy could “to some extent exceed our employment and inflation targets,” in remarks that could be viewed as implying some tolerance for overshooting its goals to coax out more investment and hiring, Bloomberg reported.

His comments at an International Monetary Fund conference in Washington on Friday follow a widely noticed observation by Fed Chair Janet Yellen last month that there were “plausible ways” a “high pressure economy” could promote healthier growth through better labor allocation and by promoting research and start-up activity.

“The trade-off of how much inflation there would be for modestly exceeding their employment objective looks very favorable,” said Laurence Meyer, a former Fed governor and head of a policy analysis firm that bears his name in Washington. Fischer’s remarks show “tolerance within limits on inflation.”

US central bankers forecast some overshooting of their lowest sustainable unemployment rate estimate of 4.8% earlier this year.

The median estimate in their September forecasts shows the unemployment rate declining to 4.6% in the final quarter of 2017 and 4.5% in 2018.

However, inflation never exceeds their 2% target, according to the median outlook of their quarterly projections.

Fischer’s comments were in the context of a question about whether stronger demand would call forth more productivity.

He said it will be answered by the behavior of output and inflation as the economy approaches or exceeds the Fed’s estimates of full resource use.

Disappointing US productivity growth has been vexing policy makers since the recovery began in 2009. Total factor productivity, a broad measure of the efficiency with which an economy uses its inputs, averaged just 0.29% in the past 12 quarters, according to the San Francisco Fed.

In his remarks, Fischer hewed closely to the Fed’s statement earlier this week that signaled the central bank’s intention to raise interest rates this year if economic reports remained on track.

“Our assessment is that the most recent data have further strengthened the case for increasing the target range for the federal funds rate,” he said in brief prepared remarks at the IMF.

Meanwhile, in its monetary policy meeting last week the Federal Reserve left its interest rates unchanged, as anticipated, strengthening expectations for a rate hike next month.

It said, "the committee judges that the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for further evidence of continued progress toward its objectives".


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