Federal Reserve Vice Chairman Stanley Fischer said both monetary and fiscal policy steps may be needed to fend off a protracted period of sub-par economic growth.
“Ultra-low interest rates are not necessarily here to stay, especially if the right policies are put in place to address at least some of their root causes,” Fischer said in the text of a speech he is scheduled to deliver Wednesday in New York.
Without citing specifics, Fischer called for “transparent and sound monetary policies here and abroad,” as well as investments in infrastructure and education, along with more effective regulation to boost productivity and longer-run potential growth.
Fischer didn’t comment directly on the near-term outlook for the U.S. economy or monetary policy in the text of his remarks to a central banking seminar organized by the New York Fed. U.S. central bankers left rates unchanged when they met Sept. 20-21 in Washington.
In more than seven years since the Great Recession, Fed officials have raised interest rates only once, in December 2015, amid persistently low inflation and slow economic activity around the world. Economists in and outside the Fed have increasingly blamed the sluggishness on longer-run trends beyond the control of central banks.
Fischer said chronically low rates could, in part, stem from a decline in the so-called natural rate — the level at which rates neither boost nor slow the economy.
“A very low natural rate of interest is worrisome because it may reflect more deep-seated economic problems,” he said.
Low potential economic growth, Fischer said, might be a result of a slowed pace of technological innovation that has led to a lower rate of investment and higher savings.
“Both increased saving and reduced investment have potentially driven the sizable decline in the natural rate of interest,” he said. “If some of the forces behind these shifts prove to be quite persistent, then we could be stuck in a new longer-run equilibrium characterized by sluggish growth and recurrent reliance on unconventional monetary policy.”
While monetary policy can help, he said, “policies to boost productivity growth and the longer-run potential of the economy are more likely to be found in effective fiscal and regulatory measures than in central bank actions.”