"As long as the labor market is healthy, the Fed could raise rates modestly, but must take care not to create headwinds for aggregate demand that could impede a transition to productivity driven growth," cautions Konstam. "Any new headwinds created by Fed tightening would likely reinforce the existing (downward) trend in real private investment."
The manifold headwinds on productivity growth (a mass retirement of the most experienced workers, a prolonged period of rising oil prices before a sharp retreat, the slow integration of new innovative technologies into the production process, and above all, soft business investment) means policy rates will stay even lower throughout this cycle than the subdued levels monetary policymakers think they'll eventually reach over the long haul, according to Bank of America Merrill Lynch analysts.
"Along with a drop in potential [growth] comes a decline in the equilibrium interest rate. In real terms – assuming 2 percent target inflation – the Fed has penciled in a long-term real R* of 1 percent with the short-run hovering close to zero," writes BofA's Michelle Meyer, with R* referring to the long-run level of the federal funds rate at which the Fed believes monetary policy would neither be stimulative nor contractionary. "Given the nature of this cycle, we are unlikely to actually reach this estimate of long-run R*."
A pick-up in capital spending by businesses will presumably foster a commensurate rise in productivity, which would allow even companies without a large deal of pricing power to avoid choosing between pressuring their profit margins or raising costs for their customers.
Otherwise, as the Deutsche Bank team writes, "this could well be a cycle that does indeed die of old age," with Corporate America electing to cut jobs to maintain profitability and ultimately fostering a downturn in consumer spending.