Daily Ticker

The Fed's moves could be a warning sign

In her quarterly news conference following the Federal Open Market Committee's policy announcement, Federal Reserve Chair Janet Yellen said the economy is rebounding from the slump in the first-quarter and projected further, quicker declines in the unemployment rate.

But Yellen's long-term projections for the economy were not quite as upbeat. The Fed lowered its long-term growth outlook for the U.S. economy to 2.1%, another downward revision. Fed officials also lowered the outlook for long-term interest rate targets to 3.75%, below the typical rate of 4%.

Related: Pimco's Gross: Fed has succeeded, but U.S. still faces permanent slump

Cardiff Garcia, U.S. Editor at FT Alphaville, points out that in her first meeting Yellen introduced language into her statement saying interest rates would remain low for a long period of time, even after the U.S. economy gets back to mandate-consistent levels of employment and inflation. “The Fed has its mandated targets: full employment and stable prices,” says Garcia. “Even after we get back to where we should be there, even after the economy is at full capacity, interest rates are going to be lower than you would historically otherwise suspect.”

Garcia thinks that this is because the potential growth rate of the U.S. economy is also lower than it has been in the past. “The FOMC’s projections for the long-term federal funds rate target is also a little bit lower than it was… I don’t want to make too much out of it but [stagnation is] what it might suggest,” warns Garcia.

Related: Stay in stocks; There's still massive liquidity in the market: Jack Ablin

Aging demographics in the U.S., low productivity growth and weak investments could all slow long-term growth, according to Garcia. He acknowledges that it’s difficult to get out of a long-term slump, but the International Monetary Fund has some suggestions that the U.S. would be wise to take. “I think infrastructure spending would be great," he says. "The nation’s infrastructure has been crumbling for quite a bit and if you do something about it now you get a lot of benefits. One is that you put some people to work, so it’s a demand-side idea, but it also raises the longer-term potential growth rate of the economy itself.”

Another way to stave of stagnation would be liberalizing immigration policy, according to Garcia. “Look, it’s not time to panic yet,” concludes Garcia. “In the short-term, people will pretty soon be able to participate in a more vigorous economy and in the long-term you never know about these things.”

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