US: Sluggish demand and lack of demand pull price inflation - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that earlier this month Fed Vice-Chair Fischer delivered a speech in which he explained several of the factors that are depressing the level of interest rates that is required for the Fed to meet its dual policy mandate.

Key Quotes

“Among these factors are the ageing demographic and the impact of this on pushing up household savings and leading to slackening demand. Slow growth in productivity, soft levels of investment and a slowing in the pace of growth overseas are also cited. The majority of these factors are common to other developed world economies. They are also outside of the control of central banks and many are likely to bear down on the equilibrium interest rate for years to come.

The lack of growth in productivity may be common to many developed economies, but there is still a lack of consensus as to the causes and the solutions to the problem. Fischer refers to the slower pace of innovation creating fewer investment opportunities. Others blame the low interest rate environment for keeping alive zombie companies and undermining the capitalist notion of creative destruction which could bring higher productivity growth albeit with the cost of higher unemployment.

Recently there has been a rise on pressure on some governments to invest in infrastructure in order to raise productivity and growth potential. That said, for many countries high levels of government debt remains a constraint. Without a solution low productivity growth will continue to reduce the future income stream for households and have a depressive impact on consumption spending. The result is sluggish demand and lack of demand pull price inflation. The consequence of this is a persistently low level of equilibrium interest rates from central banks.”