Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland, highlighted the factors that shape the long-term outlook for the economy during remarks she recently at the Central Banking Series in Dublin.
Mester emphasized that while policymakers often talk about long-term planning, they typically make decisions that prevent the economy from growing organically over the long haul.
"While monetary policy cannot affect the economy's long-term growth rate, it can do its part by returning the economy to price stability, which is necessary for the longer-run health of labor markets, the financial system, and the overall economy," Mester said. "Government policies, if they are well-designed and focused on spurring productive investments in human and physical capital, R&D, and innovation, can lead to higher productivity growth and higher longer-run growth."
Mester noted that demographic changes, such as an aging population and reduced birth rates and reduced net international migration have helped lead to a slowdown in the overall growth of the labor force. The implications of those factors could influence population dynamics, labor force participation rates, and even the demand for financial assets. Mester stressed the importance of implementing policies that encourage productive investment and innovation to offset the shrinking labor force.
Additionally, Mester noted that financial digitalization is expected to increase the "efficiency, productivity and inclusiveness of the financial sector," which should in turn increase the economic well-being of both businesses and family households.
"Ensuring a resilient financial system, through appropriate regulation and supervision that keeps up with changes in technology, is also an essential part of a healthy economy," she said.
Mester said that advancements such as robotics and artificial intelligence can boost productivity, but she cautioned that not all technological changes result in increased output. Instead, she emphasized the need for policies that support high-quality education and training, as human capital spurs growth and innovation.