Fed's Fischer says uncertainty over US government policy denting business investment

VINEYARD HAVEN, MASSACHUSETTS (BLOOMBERG) - Uncertainty surrounding US government policy may be holding back economic growth because of its negative impact on business investment, Federal Reserve vice-chairman Stanley Fischer said.

A "cautious approach to investment" by US companies "may in part reflect the uncertainty about the policy environment", Mr Fischer said on Thursday (July 6) in remarks prepared for a speech in Vineyard Haven, Massachusetts.

"Mitigating the damping effect of uncertainty by providing more clarity on the future direction of government policy is highly desirable."

Mr Fischer's comments followed the publication on Wednesday of a record of the interest-rate setting Federal Open Market Committee's June 13-14 meeting, which showed that "contacts at some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies".

The minutes of the meeting also revealed growing concern among US central bankers that a string of weak inflation data over the last few months may prevent them from reaching their 2 per cent goal for longer than they had previously anticipated.

After the US presidential elections in November, more Fed officials said upside risks to their inflation forecasts outweighed downside risks, for the first time in five years. Now, more see downside risks outweighing upside risks once again, according to the minutes.

Mr Fischer cited government spending on research and development, infrastructure, education and public health as examples of ways the White House and US lawmakers could promote faster increases in living standards.

"Government policy works best when it can address a need that the private sector neglects," he said. "Reasonable people can disagree about the right way forward, but if we as a society are to succeed, we need to follow policies that will support and advance productivity growth."