'New normal' low interest rates are pessimistic view of economic growth, local expert says

Brian Strow

Economists continue to debate whether our nation's economic growth days are over and whether low interest rates are the so-called "new normal."

The new normal foresees less gross domestic product growth and continued low interest rates because of contemporary demographics in America – fewer people being born, higher life expectancies and a smaller labor supply for employers to tap. A study released this month outlines that fact and uses statistical models to lay out its case.

The new normal approach is pessimistic, said Brian Strow, associate professor of economics at Western Kentucky University. Strow is a member of the Board of Scholars for the Bluegrass Institute for Public Policy Solutions. He also runs and writes articles for the WKU BB&T Center for the Study of Capitalism at the Gordon Ford College of Business.

"There are certainly challenging headwinds for economic growth," Strow said. He predicted the Federal Reserve will raise interest rates a quarter-point at its last meeting of 2016. He noted a quarter-point increase is not significant in the grand scheme of things.

"There's been a lot of hand-wringing over a quarter of a point."

Stanley Fischer, vice chairman of the Board of Governors for the Federal Reserve System, noted during a speech earlier this month at the 40th annual Central Banking Seminar in New York, continually low interest rates are said by some to be the new normal for not only America's economy but also economies around the world.

"The fact that interest rates have remained so low in the United States over the past eight years – well into the recovery from the severe strains of the Great Recession – suggests that ultra-low rates may reflect more than just cyclical forces," Fischer said.

"Understanding The New Normal – The Role of Demographics" a white paper in the Finance and Economics Discussion Series as part of the Fed board's education efforts, concludes that demographic factors alone account for a 1 1/4 percent decline in the natural rate of interest and real GDP growth since 1980.

"That's not earth-shattering," Strow said, adding it is a pessimistic way to look at things.

Strow said the nation's leaders could implement fiscal policies that would make the economy grow faster, but it is to the advantage of the federal government to keep interest rates low.

"They are paying on the national debt. It is like a pyramid scheme," Strow said. The national debt is pegged at $20 trillion.

The low interest rates have also made state pension systems, such as Kentucky's, less solvent. Should interest rates increase, it is to the benefit of people seeking to take on more debt.

"There are winners and losers," Strow said.

Fischer noted in his New York speech that if officials knew the natural interest rate, "conducting monetary policy would be relatively straightforward."

However, a low natural rate of interest "is worrisome" because it could reflect more "deep-seated" economic problems, Fischer said.

— Follow business reporter Charles A. Mason on Twitter @BGDNbusiness or visit bgdailynews.com.


Charles Allen Mason is the business reporter for the Daily News. He is originally from Pittsburgh, Pennsylvania. He is a 1977 graduate of West Virginia University in Morgantown. In his spare time he enjoys reading, music, sports and cooking.

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