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What’s Causing Slow Economic Growth?

We have noted the economy’s slow-growth trajectory in recent months, and as the Federal Reserve meets in Jackson Hole, Wyoming this week for its annual retreat, that’s expected to be a big topic of discussion.

The retreat, “Designing Resilient Monetary Policy Frameworks for the Future,” is sponsored by the Kansas City Fed and starts Thursday.

This story from Sunday’s Wall Street Journal provides the context for that meeting: Officials at the Fed had long thought that economic growth and inflation would have grown at a faster clip, allowing for a quicker increase in interest rates.

But amid sluggish GDP growth and mild inflation, the last rate increase was in December, and further increases in the foreseeable future are expected to be mild. The story quotes San Francisco Fed President John Williams as saying in a research note: “New realities pose significant challenges for the conduct of monetary policy.”

The critical question for policymakers is whether the slow-growth, low inflation, near-zero interest rate environment is a “transitory disruption to long-term growth or a permanent structural shift,” said Bob Hughes, senior research fellow at the American Institute for Economic Research.

“If the former is true, then economic and market forces may already be slowly reversing the disruption, and radical policy could do more harm than good,” Hughes said. “If the latter is true, then policymakers need to develop a new approach, including recognition of exactly what economic dynamics they are able to influence, and what outcomes are achievable.”

The challenge in the short term is answering the question. Answering questions on the changing nature of economic growth is difficult in hindsight and nearly impossible in real time, yet that is the task facing policymakers. The most prudent course, Hughes says, may be to plan for the latter while pursuing for the former.

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