Fischer Contradicts Yellen on Low Rates
The persistence of low interest rates could pose a serious challenge to the recovery, says Fed Vice-Chair Stanley Fischer. (Source: “Fed’s Fischer warns: Low rates could lead to ‘longer and deeper recessions’’,” Yahoo! Finance, October 17, 2016.)
In an apparent rebuttal to comments made by Chairwoman Janet Yellen earlier in the week, Fischer said that low interest rates make the economy sensitive to sudden jolts, meaning that turbulence in global markets could prolong an economic downturn.
“Low interest rates make the economy more vulnerable to adverse shocks that can put it in a recession,” Fischer warned. “The limitation on monetary policy imposed by low trend interest rates could therefore lead to longer and deeper recessions when the economy is hit by negative shocks.”
By contrast, Chairwoman Yellen had suggested that low interest rates might be needed to run a “high pressure economy.” She made the case that long-term growth potential had been curbed by the 2008 financial crisis, and that stimulative policies would be needed beyond the Fed’s two-percent inflation threshold. Analysts took this to mean low interest rates could persist for a while.
Fischer agrees that long-term growth potential is diminished; however he was careful to apportion that blame to factors outside the Fed’s control.
“Now, I am sure that the reaction of many of you may be, ‘Well, if you and your Fed colleagues dislike low interest rates, why not just go ahead and raise them? You are the Federal Reserve, after all,’” he said. But as he went on to explain, “…changes in factors over which the Federal Reserve has little influence — such as technological innovation and demographics — are important factors contributing to both short- and long-term interest rates being so low at present.”
Ten-year Treasury yields fell to approximately 1.76% at the time of writing. There was a concurrent move in 30-year Treasuries, with a slight drop to 2.516%. Markets are likely going to take some time making sense of Yellen and Fischer’s comments ahead of the November 2 meeting of the Federal Open Market Committee (FOMC). The odds of a rate hike at the upcoming meeting are minimal.
However, the odds of higher interest rates before 2017 have hit 75% on FedWatch.