Calling for gradual and patient interest rate hikes, Federal Reserve Bank of Dallas President Rob Kaplan warned that three major challenges to the economy’s health must be addressed.
The aging population, growing U.S. government debt and “skill levels and educational achievement levels” that lag other nations need to be addressed to increase potential GDP growth, Kaplan wrote in an essay posted on the Fed’s website.
“I believe the Federal Reserve should be gradually and patiently raising the federal funds rate during 2018,” he wrote, noting, economic conditions will dictate the number of hikes. “I continue to believe that gradual and patient removals of accommodation will increase the likelihood of extending the economic expansion in the U.S.”
By delaying, “excesses and imbalances begin to build, and the Fed ultimately has to play catch-up,” he said. “In my judgment, getting behind the curve and then trying to catch up would increase the likelihood of recession in the U.S.”
Although the Dallas Fed forecasts growth between 2.5% and 2.75% this year, it will drop to 1.75% to 2% by 2020, with “‘potential’ GDP growth, the sustainable underlying growth capability of the U.S. economy,” near 1.75%, “lower than we’ve historically been accustomed.”
One reason is the aging population, shrinking the workforce. And, Dallas Fed economists see the trend continuing over the next 10 years.
“Possible remedies to the effects of aging demographics could include incentives for workers to work later in their careers, inducing discouraged workers to return to the workforce and/or other measures that could help improve the rate of workforce growth in the U.S.,” Kaplan wrote.
Immigration is another source of boosting the workforce. Dallas Fed “research indicates that it would be appropriate for the U.S. to consider reforms to the current immigration system to more heavily take into account immigrant skills as well as other employment-based criteria.”
Boosting productivity could also offset this trend, he said, but “technological progress may not contribute to productivity growth as much as it once did” in part because of “lagging skills and educational achievement levels of the U.S. workforce.”
This is his second concern. “[S]everal studies suggest that skill levels and educational achievement levels of our workforce have lagged other developed countries for the last several years,” Kaplan noted.
Finally, he said, “There is a legitimate concern that the projected path of U.S. government debt relative to GDP is unlikely to be sustainable.”
Kaplan is not a Federal Open Market Committee voter this year.