"The zero interest rate in Israel is causing home prices to rise as in other countries that have zero interest rates and a functioning banking system," US Federal reserve vice chair Stanley Fischer said yesterday evening.
In a lecture at the Interdisciplinary Center Herzliya, Fischer, who was formerly governor of the Bank of Israel, said, "The research by Ben Bernanke demonstrated that the main problem in the collapse of the banks was in loans, and so an expansionist monetary policy was necessary. In the case of Israel, when you have a banking system that has not collapsed and zero interest rates, then real estate prices will grow. This is happening not just in Israel, but also in other countries, such as Norway, Singapore, and the Hong Kong region in China."
Fischer, who is on a short visit to Israel, refused to name a date for the Federal Reserve to start raising interest rates. "Everyone asks when the Fed will 'lift off' and start raising interest rates," he said. "If only I knew what the Fed is going to do, because if I knew, I wouldn't tell you. But when we talk about lift-off, we aren't taking about something similar to launching a spacecraft, but about a gradual rise, in which the interest rate will reach normal levels within a few years. We, the members of the Federal Reserve Open Market Committee, are asked a series of questions four times a year about our macro-economic forecasts. When we are asked what inflation will be in 3-4 years' time and we write 3.5-3.7%, everyone awaits the first step. We are talking about an interest rate rise from 0% to 0.25%, which is a transition from an extremely expansionist policy to a very expansionist policy.
"In 2007, the Fed raised its interest rate in 17 consecutive meetings. We aren't thinking of going back to that, and we think it will be slow and gradual. Today, there's a great debate over whether it's more correct to raise the interest rate now and gradually, or later and rapidly. According to our models, the probability that we will have to reduce the interest rate again today is 10% and in another year it will be 5%, and on the other hand the longer we wait, the probability that we will have to raise the interest rate sharply grows. The market expects that we will begin to raise interest rates in September, but our process is not determined by date but by data, and we will act when we see that economic activity is expanding."
Fischer also commented on the strengthening of the US dollar by 12% in the past year, and said this had an appreciable effect on inflation and growth. "It happened because everyone expects that the US will raise its interest rate. The economy is functioning well."
Fischer complimented Europe's economic leadership, saying, "The Europeans are working very well, and the main credit goes to the central bank. You are young people, so you have almost certainly forgotten that two and a half years ago everyone thought the euro block would break up. Today, there still problems, but no prospect of a break-up."
Fischer went on to talk about global economic problems, chiefly the slowing of growth and productivity. "For 35 years after World War II, world trade grew by 7% a year, and economies by 4%. That stopped in the global crisis. Will it resume? We very much hope it will, because that's the way that growing economies can develop. There's a great debate between Larry Summers and Kenneth Rogoff. Summers argues that we are an era of slow growth. Governments will not invest in infrastructures and growth. Rogoff and his colleague Carmen Reinhart maintain that it simply takes a very long time to recover from a recession. Who's right? We'll have to wait and see. One very negative development in recent years is the halt in productivity growth. In the OECD, in Japan, in the US, annual productivity growth between 1980 and 2007 was 1.5%. Between 2011 and 2014 it was 0.5%. The difference between 1% growth and 2% growth is 100%, because there is a cumulative effect."
Turning to his younger listeners, Fischer said, "I won't be here in another 40 years, but you will lose a great deal if productivity does not continue to grow. The coming generations will not be wealthier than the generations that preceded them that's something that governments must work on, because it will be a critical matter."
Published by Globes [online], Israel business news - www.globes-online.com - on May 26, 2015
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