Harvard Professor Says Fed Funds Rate To Stay Low

  • Posted Tuesday, June 17, 2014 at 09:00 PM

TANGIBLE INVESTMENTS - Los Angeles - by James O'Dell - The Gold price dipped slightly on Tuesday on profit taking and is currently trading at $1,270.90 an ounce, while the price of Silver rose to $19.75 an ounce ahead of the Federal Open Market Committee (FOMC) policy statement due on Wednesday. “The Fed will likely indicate that its highly accommodative stance is still needed,” said Brown Brothers Harriman.

Historically, Fed policymakers prefer to keep their benchmark federal funds rate right around 4 percent in a balanced economy, one in which inflation is at 2 percent and unemployment around 5.5 percent. The new debate at the U.S. central bank is whether interest rates should remain below that 4 percent threshold long after those targets are reached, and well into the future.

Former White House economic adviser, Lawrence Summers, now a Harvard professor, argues that the U.S. economy may have entered a period of "secular stagnation" characterized by listless economic growth. Summers says that while previous recessions were followed by a 3 percent GDP, the current economy has only been able to muster a disappointing annual rate of just 2 percent since the Great Recession ended in June 2009.

In addition to sluggish growth, consumers and businesses globally have been allocating more money to bonds thus lowering interest rates even further, Summers told WSJ. "I suspect unless circumstances change, fed funds rates may well average less than 3 percent over the next decade," he added. FOMC policymakers could also mention the current geopolitical tensions surrounding Iraq and its effect on energy prices and the economy. Fed officials know that recessions are often preceded by spiking oil prices, says Phil Flynn of Price Futures Group. “If that happens again, the Fed may have to back off of the tapering,” he added.

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