Saying he is optimistic about the economy, the vice chairman of the Federal Reserve said thinks there is a “real possibility” that recent factors holding back growth could shift and push the economy into a “higher growth trajectory.”
However, Federal Reserve Vice Chairman for Supervision Randal Quarles told the National Association of Business Economists (NABE) that the shift he sees is “a clear possibility” more than an “unarguable reality.”
“Importantly, we have not yet seen any sustained pickup in productivity growth,” Quarles said. “However, given that conditions could shift, it is fair to ask what a higher growth path might mean. As I discussed, it could mean a higher natural interest rate, which would increase the amount of accommodation provided at a given level of the Federal Reserve’s policy interest rate. But what would it imply about the appropriate stance of policy?”
Quarles said the Fed remains focused on meeting its dual mandate of maximum sustained employment and price stability. “In assessing the effect of higher growth on monetary policy, I will be carefully watching how that growth aligns with our dual mandate,” he said.
Quarles indicated he was not convinced that faster growth would lead to “firmer inflation.”
“I think a lot remains to be seen. For one, the degree to which growth spurs inflation is likely to be determined by the underlying factors that are prompting the increase in growth,” he said. “A demand-led increase can be expected to have a greater positive effect on prices than a step-up in the pace of potential growth. Growth led by an increase in the economy’s productive capacity, either through increased labor force participation or higher productivity growth, is likely to impart less upward pressure on prices.”
Speech by Vice Chairman for Supervision Quarles on an assessment of the U.S. economy