Boosting spending on infrastructure and improving education could relieve some of the burden on the US central bank to support the economy, a top policymaker said on Monday amid speculation that Congress could push through a fiscal expansion after years of budgetary restraint.
Stanley Fischer, vice-chairman of the Federal Reserve Board, said that the central bank did not need to be the only game in town and that well-targeted fiscal policies could lift America’s economic potential. He singled out reforms including better public infrastructure and encouraging private investment, as well as improvements to regulation.
“Macroeconomic policy does not have to be confined to monetary policy. Certain fiscal policies, particularly those that increase productivity, can increase the potential of the economy and help confront some of our longer-term economic challenges,” said Mr Fischer in a speech at the Council on Foreign Relations in New York.
Donald Trump’s aides have been discussing a major fiscal stimulus package as they look to deliver on vows to generate millions of jobs and lift GDP growth to 4 per cent or higher. The president-elect has put forward a tax-cutting package that would cost $6.1tn in lost revenue over 10 years, as well as arguing for a large infrastructure programme, while Republican leaders in the House have suggested a more conservative programme.
Stephen Bannon, Mr Trump’s chief strategist, has said the administration should take advantage of negative interest rates to push through a $1tn infrastructure plan, saying there was “the greatest opportunity to rebuild everything”.
With Mr Trump still choosing his economic team, it is far from clear what kind of budget package will ultimately emerge from Congress next year. But fiscal conservatives in the GOP are likely to push back against a dramatic fiscal loosening, while many analysts also worry about the protectionist policies Mr Trump has vowed as he promises to reverse the loss of factory jobs to overseas.
Lewis Alexander, chief US economist at Nomura in New York, said the Fed was likely to be sympathetic to the idea that there could be more fiscal stimulus because this could lift potential output and the neutral rate of interest, giving the central bank more room to cut rates in a downturn.
However, he added: “The Fed is in a wait-and-see mode right now, as they watch to see what Congress will actually end up doing on fiscal policy. The economy is close to full employment. If Congress passes a big fiscal stimulus it is very likely to have an impact on the trajectory of interest rates — it could accelerate Fed rate increases.”
Fed chair Janet Yellen said last week that the election result had not thus far altered the Fed’s stance on monetary policy as she continued to signal the prospect of a rate increase next month. “When there is greater clarity about the economic policies that might be put into effect, the [Federal Open Market Committee] will have to factor in those assessments of their impact on employment and inflation and perhaps adjust our outlook,” she said.
However, central bankers have long implored lawmakers around the world to bear more of the weight of supporting growth, following years of ultra-expansionary monetary policy.
Last week, James Bullard of the St Louis Fed said the US was likely to be affected by fiscal changes from 2018 onwards. “A targeted fiscal infrastructure package, changes in the regulatory environment, and some tax reforms could lead to faster productivity growth, more domestic investment and, therefore, faster real GDP growth,” he said.
Despite the US approaching the Fed’s employment and inflation targets, the country has not seen a “happy recovery”, Mr Fischer said. “Unease with the economy reflects a number of longer-term challenges, challenges that will require a different set of policy tools than those used to address nearer-term cyclical shortfalls in growth. Prominent among these challenges are low equilibrium interest rates and sluggish productivity growth in the United States and abroad.”
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