Fed's Yellen acknowledges difficulty of escaping world's low rate grip

Wed Jun 15, 2016 4:37pm EDT
 
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Howard Schneider

WASHINGTON (Reuters) - Evidence that the U.S. neutral rate of interest remains stalled near zero spurred the Federal Reserve to slow its expected pace of rate hikes on Wednesday, as policymakers signaled their hands may be tied until a rebound in global demand or other forces raise that key measure of the economy’s underlying strength.

In a news conference following the Fed's latest meeting, Chair Janet Yellen said the central bank was still coming to grips with the likelihood that the neutral rate - the point at which monetary policy is neither spurring nor restraining economic growth - is stuck at a historic low and could limit the central banks room to maneuver.

In the Fed's policy debate, "an important influence is what will happen to that neutral rate," Yellen said, noting that the central bank's "base case" is that the rate should rise alongside an improving economy and as "headwinds" from the 2008-9 financial crisis fade.

But "there are long-lasting, more persistent factors that may be holding down the longer-run level of neutral rates," Yellen said.

"It could stay low for a prolonged time....All of us are in a process of constantly reevaluating where the neutral rate is going, and what you see is a downward shift over time, that more of what is causing this to be low are factors that will not be disappearing."

Policymakers nodded directly at the problem in fresh economic projections that cut median estimates of the long-run federal funds rate to 3 percent, far below the levels common in the 1990s. Since the Fed began publishing policymakers' economic projections in 2012, estimates of the long-run rate have been cut from 4.25 percent.

"There could be revisions in either direction," Yellen said. "A low neutral rate may be closer to the new normal."

  Continued...

 
U.S. Federal Reserve Chair Janet Yellen holds a news conference following the Fed’s two-day Federal Open Market Committee (FOMC) policy meeting in Washington, June 15, 2016. REUTERS/Kevin Lamarque