Why America's growth target is 'challenging'

Federal Reserve Chair Janet Yellen warned that the Trump administration target of three per cent growth will be "quite challenging" to meet.

President Donald Trump had promised during last year's campaign to push the growth rate to four percent, but administration officials have since lowered the goal to three per cent, acknowledging it will take time to accomplish.

But Yellen, calling it "very disappointing", cautioned that the US economy's potential to grow is currently estimated at two per cent.

Asked if it would be possible to reach three per cent over the next five years, Yellen said, "I think it would be quite challenging."

She said such a high growth rate would require accelerating productivity growth to two per cent from the current 0.5 per cent, a big jump since increases of only a few tenths of a point are considered significant.

A three per cent growth rate "would be wonderful if you can accomplish it. I would love to see it," Yellen told the Senate Banking Committee on the second day of her semi-annual testimony on monetary policy.

It could be her last time as Fed chair if Trump decides not to reappoint her for a second four-year term when her term expires February 3, 2018.

Yellen highlighted the factors holding down productivity growth, which is related to the difficulty companies report finding qualified workers, stressing the need to focus on worker training and education. In what may have been a first for usually dry monetary policy discussions, Yellen warned that the opioid crisis is having an impact of the US economy, removing men in their prime from the workforce, sometimes permanently.

"Many individuals with less education are finding it difficult to be placed in jobs that are middle-income jobs," Yellen said, a problem that "intensified during the recession."

"Unfortunately, this is likely tied to the opioid crisis," she said.

"We've even seen an increase in death rates due to deaths of despair, suicides, drugs," something not seen in other economies, she added. More than 33,000 people died in 2015 from an overdose of opiates, including 20,000 from prescription drug overdoses, according to the latest figures from the Centers for Disease Control. "This is a very serious matter," she said.

While declining to offer specific policy prescriptions, Yellen agreed that some "distortions" in the tax code also are holding back productivity growth. "Appropriately-designed tax reform could have favourable effect on productivity. Obviously it depends on the details," she said.

Worker training, increasing public and private investment, and research and development also could boost the economy's efficiency and "potential to grow," Yellen said.

With the unemployment rate near its historic low at just 4.4 per cent, Yellen said she expects wages to begin to rise, which in turn would push prices higher. But inflation remains below the Fed's two per cent target at 1.4 per cent, a fact that has baffled economists given the strong labour market.

Yellen said it is too early to say inflation is on a slower track, especially since the rate has been held down by lower prices for cell phone service and prescription drugs, which were only temporary.

But while the central bank expects to make gradual increases in the benchmark lending rate over time, she said that could change as more data comes in.

While such low inflation normally would keep the Fed from raising interest rates, it has instead hiked rates twice so far this year, and expects to do so once more.

Source: Khaleej Times