Low interest rates will persist, Federal Reserve Bank of Chicago President Charles Evans said Wednesday.
"The point is the low interest rate environment is not just a U.S. phenomenon, or simply a situation engineered by Federal Reserve policy," he said at a St. Louis conference, according to prepared text released by the Fed. "Rather, it is a global phenomenon with underpinnings in economic fundamentals that are central to the framing of monetary policy."
And that environment won't change soon. "I feel we will likely be in a low interest rate environment for some time, which leaves monetary policymakers with less room to navigate future downside shocks should they occur. This is one reason that monetary policy is expected to normalize at a very gradual pace. And even once it has normalized, the new equilibrium likely will be one with lower interest rates than we have experienced in the past."
Gross domestic product growth of an average of 2%, compared to 3.5% in the three prior expansions, results from some demographic changes, he said. As Baby Boomers retire, the labor market is shrinking. "Also, a plateauing in educational achievement and the retirement of highly experienced workers mean that improvements in the quality of the workforce are already contributing less to productivity growth than they have in the past," Evans said.
He also cited total factor productivity, "technologies and operational systems that businesses use to combine various inputs into outputs." He said, "The recent trends relating to TFP have not been good," citing a San Francisco Fed report that TPP is only about 0.5%, way below the 1.75% pace in the mid-1990s through the mid-2000s. "Therefore, according to these estimates, just from TFP alone, overall productivity growth in the U.S. economy today is more than 1 percentage point lower than it was during that high-growth period."
The interest rate outlook "is vastly more complicated today than it was before. Most analysts have come to expect that both short-run money rates and longer-term interest rates will be lower over the long run than they had expected just a few years ago," Evans said.
