Ex-Fed Chair Yellen says central bank too ‘optimistic’ about U.S. economy

U.S. Federal Reserve’s estimates for long-term economic growth may be a bit too optimistic, said former Fed Chair Janet Yellen on Friday.

The U.S. central bank kept the median estimate for long-term growth at 1.9 percent earlier this month. An expansion of 1.9 percent is lackluster compared to growth rates of previous decades when the economy consistently expanded by at least 3 percent.

However, Yellen thinks the Fed may be overestimating the strength of the U.S. economy with its forecast. “It’s actually an optimistic projection,” she said, citing three factors: demographics, education, and productivity.

On demographics, Yellen noted that labour-force growth is approximately a meager 0.5 percent as population growth has slowed down in recent years. She added that, in the 1980s, labour-force growth got a boost from “an influx of women” joining the force.

“Another reason the 1.9 percent number is not very high has to do with education. Improvements in average educational attainment of the labour force also boost economic growth,” said Yellen, who was Fed chair between 2014 and 2018. “That’s continuing to rise, but it’s not rising … as rapidly as it used to.”

Yellen also said productivity has remained stubbornly low for years. U.S. labour-force productivity has grown by more than 2 percent in just four quarters since the start of 2015, data from the Labor Department shows.

The U.S. economy expanded by 2 percent in the second quarter of 2019, boosted by the strongest growth in consumer spending in over four years. However, business investment contracted by 1 percent, far more than a previous estimate of 0.6 percent.

“The economy seems less dynamic than it used to be,” Yellen said at an event organised by Georgetown University.

Source: CNBC