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Fed's Quarles 'optimistic' about economy, says growth may pick up further

Randal Quarles, the Federal Reserve's vice chairman for supervision, said Feb. 26 that he is "optimistic" about the U.S. economy and suggested that it may soon grow beyond the modest levels it has been experiencing.

Still, he cautioned at a Washington, D.C., event, that outlook is more of a "clear possibility than an unarguable reality."

"My assessment of the current state of the economy is optimistic," he said at a National Association for Business Economics conference. "I also think there is a real possibility that some of the factors that have been holding back growth in recent years could shift, moving the economy onto a higher growth trajectory."

For example, Quarles said, technologies such as artificial intelligence and genetic sequencing "appear on the cusp of breaking out," and tight labor markets could encourage companies to increase their robotics investments and lift productivity growth.

The recently enacted tax overhaul, he added, will likely boost investment and increase capital, although he also said higher deficits could have negative long-term effects.

Quarles said it is "too soon to call a turning point" in the economy's long-run growth potential, but added that it is important to recognize that "there are some upside risks to the forecast" that may lead to other developments.

For one, he said, higher growth levels could also increase the natural rate of interest, which has been held down since the financial crisis. A higher natural rate, he said, would give the Federal Reserve more room to cut interest rates during the next economic slowdown.

It also means that the Fed could have more room to increase interest rates going forward as it continues its "gradual removal of policy accommodation," he said.

"It is important to point out however that this higher policy path would be motivated by sustained stronger growth and improved economic conditions, not a greater desire to slow the economy," he said.

Quarles was also asked about recent recommendations from the U.S. Treasury Department that would create a new "Chapter 14" bankruptcy code for financial institutions. The agency also recommended keeping a revised orderly liquidation authority, or OLA, to be used in emergency situations, disappointing some Republicans who wanted to eliminate that authority.

Treasury's recommendations, he said, are "feasible" and have considerable support from government leaders and academics.