Federal Reserve economists worry that the central bank may have a hard time lowering interest rates when future economic crises arise.
The reason is fairly simple: Demographics. San Francisco Fed economists believe that the aging population in the U.S. is putting long-term downward pressure on rates, a phenomenon that won’t allow a lot of room to provide stimulus through rate cuts.
“Because demographic movements tend to be long-lasting, their ongoing effects could keep interest rates near the lower bound longer,” Carlos Carvalho, Andrea Ferrero and Fernanda Nechio said in a paper posted on the San Francisco Fed web site. “This has the potential to limit the scope for central banks to respond to future recessionary shocks.”
Essentially, the population collectively getting older and living longer means those folks have to save more. That in turn means financial institutions don’t need to pay as much interest on savings due to the increased flow of savings.
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