MNI Fed's Quarles:Could Shift to Higher Growth on Fiscal Boost

By Jean Yung

     WASHINGTON (MNI) - It's too early to call a turning point, but Federal

Reserve Gov. Randy Quarles on Monday flagged the "real possibility" that the

U.S. economy could shift into a higher growth trajectory. 

     Some of the factors holding back growth -- weak business investment, low

productivity gains and an aging population -- could dissipate, particularly with

the help of recently passed tax incentives. However, whether a higher growth

path translates into higher inflation depends on the mechanics behind the

growth, Quarles said. 

     "I think it is too soon to call a turning point in the long-run growth

prospects of the economy, notwithstanding some encouraging signs that I have

highlighted," he said in remarks prepared for a National Association for

Business Economics conference in Washington. "All the same, I think it is

worthwhile to acknowledge that there are some upside risks to the forecast and

to think through what the consequences of those risks materializing might be." 

     Fiscal policy is likely to impart "considerable momentum to growth over the

next couple of years" by increasing demand and boosting the potential capacity

of the economy, he said. 

     The recent tax legislation could give some workers an incentive to remain

in or enter the workforce, prolonging the sideways movement in labor force

participation, Quarles said.

     Lower corporate tax rates and other incentives will also likely boost

investment and increase the capital stock, especially as businesses become more

confident in the sustainability of the era of higher growth, he said. 

     It might also be true that productivity growth will be "nudged higher" by

the pace of economic activity, Quarles said, as tight labor markets induce firms

to invest more in robotics and other labor-saving technology, for example. 

     "A sustained increase in growth could be associated with an increase in the

natural rate of interest" through a sustained increase in productivity growth or

other factors, he said. That would prompt the Fed to raise interest rates in

tandem as the economy strengthens.

     However, growth led by an increase in the economy's productive potential is

"likely to impart less upward pressure on prices," he noted. 

     "It might seem reasonable to assume that faster growth would lead to firmer

inflation. However, I think a lot remains to be seen," he said. 

     For now, the Fed's plan for "further gradual increases in the policy rate"

remains appropriate, Quarles said. He expects inflation to move toward the Fed's

2% target over the next year as tightness in the labor market shows up in wages

and prices. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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