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Federal Reserve Sees U.S. Economic Growth as Steady but Slow
By BINYAMIN APPELBAUMJULY 7, 2017

WASHINGTON — The Federal Reserve’s view of the American economy, which it updated Friday in a semiannual report to Congress is out: steady growth still impeded by a range of problems.

The report gives the reasons for confidence, describing the steady growth of consumer spending on the foundation of a solid economic expansion. However, it also highlighted a number of reasons that growth has remained relatively slow by historical standards.

The Fed raised its benchmark interest rate in June for the third consecutive quarter, a sign of confidence in the strength of the economy. It also announced that it planned to start reducing its securities holdings by the end of the year.

The Fed pointed to evidence that lenders are seeking opportunities to take larger risks. It noted, for example, that companies with poor credit ratings are able to borrow at interest rates that are unusually close to the rates for companies with good credit ratings. The differences “now stand near the bottom of their historical ranges,” the Fed said.

Yet demand for loans remains weak. “Apparent high risk appetite in asset markets has not led to increased borrowing in the nonfinancial sector,” the report said.

In a similar vein, the Fed said banks reported a broad decline in loan demand during the first quarter of 2017, “even as lending standards on such loans were reported to be basically unchanged.”

The Fed publishes the assessment, called the Monetary Policy Report, twice a year, in the winter and the summer. Janet L. Yellen, the Fed’s chairwoman, will appear before House and Senate committees on Wednesday and Thursday to present the report.

Stanley Fischer, the Fed’s vice chairman, said Thursday that uncertainty about federal fiscal policy may be weighing on the economy once again. Businesses reported a burst of optimism after President Trump’s election, in part because of hope that the new administration would enact fiscal policies like tax cuts. But that optimism is flagging.

“This cautious approach to investment may in part reflect uncertainty about the policy environment,” Mr. Fischer told an audience in Vineyard Haven, Mass. “Providing more clarity on the future direction of government policy is highly desirable.”

The report noted, however, that business investment “rose robustly” in the first quarter, thanks to increased spending on drilling and mining equipment, which could indicate a shift.

The low level of investment may be one reason for the slow pace of productivity growth, an average annual pace of just 1 percent, about half the pace during the period from 1990 to 2004.

Productivity growth in the United States remains a little bit faster than in other developed countries.

The slow pace of productivity growth is an important reason that employee compensation is rising slowly. A measure of hourly compensation that includes wages, salaries and benefits rose at an annual pace of 2.25 percent over the last four quarters, the Fed said. Measures of wage growth, excluding benefits, are in the same ballpark.

There is some evidence of a modest upward trend as the labor market has tightened, but the growth remains very weak by historical standards.

The eagerness of investors is driving up a wide range of asset prices, a trend the Fed said had continued since its last report in mid-February. It noted that “valuation pressures have increased further” for Treasury securities, equities, corporate bonds and commercial real estate.

But the Fed is not sounding alarms. “Vulnerabilities in the U.S. financial system remain moderate on balance,” it said.

It also dismissed persistent concerns about the liquidity of financial markets, particularly the market for corporate securities.

“Available evidence suggests that financial markets have performed well in recent years, with minimal impairment in liquidity, either in the market for corporate bonds or in the market for other assets.”

https://www.nytimes.com/2017/07/07/us/politics/federal-reserve-economy-us-growth.html?ref=business