Fed’s Powell increasingly worried on secular stagnation

Former treasury secretary Larry Summers, who has been warning along with other economists that the U.S. economy may be stuck in a state called secular stagnation may have found a worrying fellow at the U.S. Federal Reserve. So far, Fed officials have shrugged off Mr. Summers’ proposal but in an interview with Financial Times, Fed official Jerome Powell indicated that he has become alive to the idea and increasingly worries on it. He said, “I am more worried about it than I was…….The probability of an era of weaker growth, lower potential growth, for a longer period of time…..that worries me more than it used to.” He added that to achieve the forecasted growth, rates have to be lower than he thought before. Since 2015, there has been a gradual decrease in Fed’s long-term interest rate forecast and Mr. Powell, who has a vote on policy, thinks that process may not be over. He thinks long-term rate forecast may drop further from current 3 percent.

He gave out many direct signals that he may not be voting for a hike anytime soon.

• He said that the Fed can remain patient as inflation is still below target.
• He also added that he won’t be pounding the table calling for hikes.

Next Fed meeting is scheduled for mid-September and the Fed is unlikely to hike rates at that meeting.

However, the recent block buster jobs report last week has led to the rise in speculation that the Fed may go for a hike this year.