A top Federal Reserve official said Monday that ultra-low interest rates are dangerous for the economy, but there is not too much the central bank can do on its own to raise them.
Speaking in New York City, Fed Vice Chairman Stanley Fischer warned that “it is not that simple” for the Fed to raise rates, and that factors beyond the Fed’s control are holding interest rates low.
The speech was both a warning about the possible dangers to the U.S. economy posed by short-term interest rates near zero, and an explanation of the forces that could prevent the Fed from raising its short-term interest rate target by much in the near future, even as the U.S. recovery stretches toward an eighth year. A lower interest rate target over a longer period of time would influence mortgages, business loans, and credit across the economy, as well as raise skepticism from Congress.
Low interest rates could pose risks to the economy, Fischer said, because they create incentives for investors to make more speculative bets in order to earn returns, raising the possibility of bubbles. It’s also a problem, he noted, because the country could head into the next downturn with the Fed’s interest rate target near zero, meaning that the Fed would have little room to cut rates in response. The Fed could instead try unconventional monetary policies like the quantitative easing programs it launched during the recession, but those aren’t “perfect substitutes” for lowering rates, Fischer said.
Meanwhile, the market may be demanding lower rates, Fischer explained, for a number of reasons. Among those are that slower expected economic growth means lower returns to saving and investing, the aging population is saving more, and other countries are facing slowing growth and investing in U.S. bonds for safe returns.
