Monetary policy is complicated by the aging population leaving the workforce, thereby lowering productivity, Federal Reserve Bank of Philadelphia President Patrick T. Harker said Thursday.
An older population and lower productivity likely lowers the natural rate of interest and slows gross domestic product growth, Harker told the World Affairs Council of Philadelphia, according to prepared text released by the Fed. "These are difficult to measure in the first place, so changes to their fundamental nature complicates monetary policy."
"The lower the natural funds rate, the closer the current funds rate will be to that level, which means policy will have a shorter distance to travel to full normalization. That's important because it gives us less room to maneuver," he said. "Monetary policy is a relatively blunt tool; a smaller window for operation is more appropriate for a scalpel."
The Fed's toolbox could also be an issue, he said. "Recent studies have found that monetary policy's efficacy has been waning since the mid-1980s, and that this can be linked to the aging of the population8 Given our demographic realities, this puts even more pressure on fiscal and other policies to take a long-term look at policies that can nurture growth."
He suggested immigration could stimulate the economy. "I'm not directing anyone which path to go down, but I am saying that we need to take one."
