Fed Officials See Less Need for Tax and Spending to Boost Short-term Growth
January 16 2017 - 8:29AM
Dow Jones News
By Shayndi Raice
Federal Reserve officials increasingly say they don't see a need
for stimulative government tax and spending programs to boost
short-term economic growth, reversing their stance during and after
the Great Recession.
The shift is drawing attention as President-elect Donald Trump
prepares to takes office on the promise of tax cuts and spending
increases. He has promised annual U.S. economic growth of as much
as 4%, double the 2% seen since the recession.
To several Fed officials, the need for such fiscal stimulus to
raise overall demand is a thing of the past -- the postcrisis
period when unemployment peaked at 10%. Today, with joblessness
down to 4.7%, they instead advocate targeted policies to spur
long-term economic growth by raising productivity -- or output per
labor hour. These would include improving education and
infrastructure, fostering research and encouraging new business
formation.
"I would say at this point fiscal policy is not obviously needed
to provide stimulus to help us get back to full employment," Fed
Chairwoman Janet Yellen said in December.
To some observers, the turnabout appears political: Fed
officials supported fiscal stimulus during the Obama administration
but don't as Mr. Trump takes the helm. However, central bankers see
this as a return to normal now that the economy has healed.
Underlying the Fed's shifting view is a long-running economic
debate about the appropriate interplay between monetary and fiscal
policy in managing the economy.
Before the 2008 crisis, many economists agreed that monetary
policy was a better tool than fiscal policy for managing the
short-term ups and downs of the business cycle. Central banks could
quickly cut interest rates to boost economic activity in a
recession or raise them to cool the economy if it overheated.
Changes in government tax and spending programs generally take
longer to enact because of congressional wrangling and are better
targeted at the economy's long-term needs, the thinking goes.
In the 1990s the Fed, under then-Chairman Alan Greenspan, cut
rates in response to a recession, raised them mid-decade to prevent
the economy from overheating, and lifted them again later during
the tech boom. Meantime he frequently urged Congress and the White
House to reduce projected federal budget deficits. In early 2001,
after budget surpluses appeared, he supported tax cuts.
The thinking changed after the crisis, when the Fed and central
banks in other advanced economies cut rates to near zero, only to
see a deep global recession in 2009. The collapse in demand was so
great, and their policy options so limited, that many monetary
policy makers called for help -- urging governments to ramp up
short-term spending and make structural changes to their economies
to foster economic growth.
European Central Bank President Mario Draghi has for years urged
European governments to do more to fuel growth, saying monetary
policy "can't do everything." Bank of Japan Governor Haruhiko
Kuroda has been urged by some economists to adopt a policy called
"helicopter money," in which the central bank prints money in
direct support of tax cuts and government spending increases.
In the U.S., however, the economic tide has turned. Fed
officials raised interest rates in December, their second increase
in a year, and foresee more increases this year if it stays
healthy. In this context, they've returned to the old view.
"I don't see a need of the kind of fiscal policy just to
stimulate aggregate demand," Cleveland Fed President Loretta Mester
said in a recent Journal interview. "If we could come up with
policies that are productive in terms of raising productivity
growth, that can help our long-run economy, then those are good
things," she said, citing as examples educational programs to help
workers move into new jobs and efforts to improve internet access
across the country.
Chicago Fed President Charles Evans made a similar argument last
month when he said that with a strong labor market "you don't need
explicit stimulus."
Fed Vice Chairman Stanley Fischer said in October, "Some
combination of more encouragement for private investment, improved
public infrastructure, better education, and more effective
regulation is likely to promote faster growth of productivity and
living standards."
Some Fed watchers see political implications in the shift. "Call
me a skeptic, if you will, but had [Hillary] Clinton won, I don't
think Fed officials would be walking back their comments on more
fiscal spending," said Brian Horrigan, chief economist at Loomis
Sayles & Co.
But PNC Financial Services Deputy Chief Economist Gus Faucher is
among those who view it as a reflection of the Fed's confidence in
the economy. "I think that the reason why simply is that the
economy now is in better shape than it has been in any time since
before the recession started," he said.
Write to Shayndi Raice at shayndi.raice@wsj.com
(END) Dow Jones Newswires
January 16, 2017 08:14 ET (13:14 GMT)
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