Fed official: US policy uncertainty holding down investment

US political uncertainty over health care and tax reform is causing businesses to hold off on investments, a top Federal Reserve official said Monday.

(AFP)

US political uncertainty over health care and tax reform is causing businesses to hold off on investments, a top Federal Reserve official said Monday.

Low investment, in turn, is one factor contributing to stubbornly low interest rates, Fed Vice Chair Stanley Fischer said.

"For one, uncertainty about the outlook for government policy in health care, regulation, taxes, and trade can cause firms to delay projects until the policy environment clarifies," he said in a speech to a conference in Brazil.

The US Senate last week defeated another effort to repeal the Affordable Care Act put in place under former President Barack Obama, but the fate of the law remains in doubt as President Donald Trump has threatened to cut off funding that makes the insurance plans affordable for many families.

Meanwhile, Trump's promised tax reform plan has not gone beyond a single-page of general goals, and seems unlikely to make it through Congress this year.

But Fischer said slow economic growth is the main factor holding down long-term interest rates, even after the Fed raised the benchmark federal funds lending rate by a full point in the past 18 months, including two rate hikes this year.

Persistent low rates are a concern if they signal an economy unlikely to grow faster, or if they drive investors to "reach for yield" moving into riskier investments which "could potentially hurt financial stability."

The US economy grew by 2.6 percent in the second quarter, more than double the pace in the first three months of the year. The longer-term potential growth rate has slowed to 1.5 percent, half what it was in the years leading up to the 2008 financial crisis, according to the Congressional Budget Office (CBO).

Fischer said that is a concern because "slower growth diminishes the number of business opportunities that can be profitably undertaken, weighing on investment demand."

He said a "prime culprit" in the growth slowdown has been the slow rate of labor productivity growth, which has increased only 1/2 percent, on average, over the past five years, compared with a two percent growth rate over the period from 1976 to 2005.

An aging population which is shrinking the labor force also impacts trend economic growth, he said.