Fed's Kashkari says fiscal, rule reforms needed to boost growth

[NEW YORK] The US government should consider fiscal and regulatory reforms to boost economic growth because the scope for low interest rates alone to do so is limited, said Federal Reserve Bank of Minneapolis President Neel Kashkari.

"We are likely seeing a confluence of three fundamental causes all combining to slow the economic recovery: (1) challenging demographics, (2) psychological scarring from the crisis and (3) lackluster technological innovation. Unfortunately, these headwinds aren't likely to reverse anytime soon on their own," Mr Kashkari wrote in an essay posted on Monday on the website Medium. "Monetary policy is largely doing what it can to support a robust recovery, and what remains are fiscal and regulatory policies."

The Minneapolis Fed chief said investing in infrastructure while borrowing costs are still near record lows, "simplifying the tax code and making it more consumption-oriented," and reducing the regulatory burden of businesses are policies with "little downside risk."

Mr Kashkari also questioned the wisdom of raising the Fed's inflation target to provide more stimulus - a strategy floated last month by San Francisco Fed chief John Williams among other suggestions to spur growth - saying such a move carries "significant downside risks."

CREDIBILITY WEAKENED

"If we announced a new higher target, it isn't clear why anyone would believe that we could hit it," he wrote.

"The Federal Reserve's credibility could be weakened."

The US central bank's policy-setting Federal Open Market Committee meets Sept 20-21 to discuss its target range for overnight interest rates, which has been left unchanged at 0.25 to 0.5 per cent since a hike in December that marked the first in nearly a decade.

A slowdown in economic growth, sluggish inflation, and increased uncertainty about the outlook have so far prevented another move.

Mr Kashkari, an FOMC participant who does not vote on decisions this year but will next year, suggested there may be little scope for additional cyclical stimulus stage in the business cycle, and policy makers should instead focus on longer-term solutions.

"Chronically weak demand might have been an important part of the diagnosis for the US economy in the depths of the recession, when many workers and factories were idled," he wrote.

"By 2016, however, the labor market appears closer to normal, which limits how much can be achieved by boosting demand to increase employment further."

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