• Kaplan says rate that neither spurs nor slows growth is lower
  • Dallas Fed chief says weak productivity damping neutral rate

The level of interest rates that neither spurs nor slows growth has probably fallen, giving monetary policy makers less room to stimulate the economy, Dallas Federal Reserve President Robert Kaplan said.

“I am strongly persuaded by arguments that aging demographics in advanced economies, a decline in productivity growth and the continued emergence of the U.S. as a source of safe assets have all contributed to the decline in the neutral rate,” Kaplan said in a speech prepared for delivery Thursday at the Money Marketeers dinner in New York. “Monetary policy has a key role to play in economic policy. However, at or near the zero lower bound, it may be less effective than other tools of economic policy.”

In a wide-ranging speech in which he detailed why the neutral rate might be lower, Kaplan also urged patience in raising interest rates, saying that accommodation should only be removed “based on a realistic assessment of economic conditions.” He called for fiscal policy makers to pick up the torch to help stimulate the U.S. growth outlook.

“For the past eight years, advanced economies have relied heavily on monetary policy and much less on fiscal policy as well as other structural reforms,” Kaplan said. “If we are going to generate higher sustainable rates of GDP growth and address key secular issues, there needs to be policy action beyond monetary policy.”

Kaplan’s comments come at a time when pessimism about long-run growth prospects is gripping the Fed. Last week, St. Louis Fed President James Bullard cut his interest rate forecast to one increase through 2018, citing lower productivity, among other factors. San Francisco Fed President John Williams co-authored a paper released this week finding that neutral rates have fallen in the U.S., euro area, U.K. and Canada.

In testimony before the Senate Banking and House Financial Services Committee this week, Fed Chair Janet Yellen said “although I am optimistic about the longer-run prospects for the U.S. economy, we cannot rule out the possibility expressed by some prominent economists that the slow productivity growth seen in recent years will continue into the future.” Tepid productivity gains curb progress in wages and output.

In his speech Thursday, Kaplan said that investing in education, upgrading infrastructure and reforming tax and regulatory policies and entitlement programs could boost the economy’s potential.

“I am optimistic about the strength of the U.S. economy and the future of this nation,” Kaplan said. “However, this optimism is based on a belief that we as a nation will address pressing secular as well as shorter-term cyclical challenges.”

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