In World Economy News 28/09/2016
The Federal Reserve can keep interest rates low for longer because even though the economy is creating jobs at a “pretty healthy clip,” there are no signs of inflationary pressures, a top Fed official said on Wednesday.
“The economy still has room to run before it overheats,” Minneapolis Fed President Neel Kashkari said at the Institutional Investor Conference in Minneapolis, which was streamed live on the bank’s website.
Fed Chair Janet Yellen last week used an identical phrase when she explained the reasoning behind the Fed’s decision to keep interest rates low for the time being, even though unemployment at 4.9 percent is near what most economists say represents full employment and inflation is showing some signs of firming.
The Fed raised its interest-rate target last December for the first time in nearly a decade, but has deferred any further increases out of concern that a global slowdown or financial market turmoil could hurt the U.S. recovery. Kashkari does not have a vote on the Fed’s policy committee this year, but his comments show he sides with the doves at the Fed who have carried the day on policy decisions throughout the year.
The U.S. economy is likely headed for “continued slow but steady” growth around 2 percent a year, he said, although that outlook could be affected by the slowdown in China or possible longer-term affects of Britain’s decision to exit the European Union. So far Brexit has had little impact on the U.S. economy, he said.
Inflation and inflation expectations are for now coming up short, he said, in part reflecting global trends and in part because workers sidelined during the recession are reentering the workforce.
“The big question in the U.S. is, what is happening in the labour market; how much more slack is in the U.S. labour market, of workers who can reenter the labour force before this tight labour market becomes inflationary,” he said.
Kashkari added that the Fed sees no signs of a housing bubble reform, although the Fed is has “some concerns” around commercial real estate and is monitoring the sector closely.
Source: Reuters (Reporting by Ann Saphir; Editing by Chizu Nomiyama)
