POINTS

  • The Fed kept the median estimate for long-term growth at 1.9% earlier this month.
  • An expansion of 1.9% is lackluster compared to growth rates of previous decades when the economy consistently expanded by at least 3%.
  • But Yellen thinks the Fed may be overestimating the strength of the U.S. economy with its forecast.
  • “It’s actually an optimistic projection,” she says, citing three factors: demographics, education and productivity.

WASHINGTON — The Federal Reserve’s estimates for long-term economic growth may be a bit too positive, former Fed Chair Janet Yellen said Friday.

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

But 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 labor-force growth is approximately a meager 0.5% as population growth has slowed down in recent years. She added that, in the 1980s, labor-force growth got a boost from “an influx of women” joining the force.

“Another reason the 1.9% number is not very high has to do with education. Improvements in average educational attainment of the labor 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. labor-force productivity has grown by more than 2% in just four quarters since the start of 2015, data from the Labor Department shows.

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

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

Source: https://www.cnbc.com/2019/09/27/former-fed-chair-yellen-central-bank-is-being-optimistic-about-growth.html