JACKSON HOLE, Wyo. (MNI) – The following is the second of three
sections of Federal Reserve Chairman Ben Bernanke’s remarks prepared for
the Kansas City Fed’s Symposium under way Friday:
Notably, the housing sector has been a significant driver of
recovery from most recessions in the United States since World War II,
but this time–with an overhang of distressed and foreclosed properties,
tight credit conditions for builders and potential homebuyers, and
ongoing concerns by both potential borrowers and lenders about continued
house price declines–the rate of new home construction has remained at
less than one-third of its pre-crisis level. The low level of
construction has implications not only for builders but for providers of
a wide range of goods and services related to housing and homebuilding.
Moreover, even as tight credit for some borrowers has been one of the
factors restraining housing recovery, the weakness of the housing sector
has in turn had adverse effects on financial markets and on the flow of
credit. For example, the sharp declines in house prices in some areas
have left many homeowners underwater on their mortgages, creating
financial hardship for households and, through their effects on rates of
mortgage delinquency and default, stress for financial institutions as
well. Financial pressures on financial institutions and households have
contributed, in turn, to greater caution in the extension of credit and
to slower growth in consumer spending.
I have already noted the central role of the financial crisis of
2008 and 2009 in sparking the recession. As I also noted, a great deal
has been done and is being done to address the causes and effects of the
crisis, including a substantial program of financial reform, and
conditions in the U.S. banking system and financial markets have
improved significantly overall. Nevertheless, financial stress has been
and continues to be a significant drag on the recovery, both here and
abroad. Bouts of sharp volatility and risk aversion in markets have
recently re-emerged in reaction to concerns about both European
sovereign debts and developments related to the U.S. fiscal situation,
including the recent downgrade of the U.S. long-term credit rating by
one of the major rating agencies and the controversy concerning the
raising of the U.S. federal debt ceiling. It is difficult to judge by
how much these developments have affected economic activity thus far,
but there seems little doubt that they have hurt household and business
confidence and that they pose ongoing risks to growth. The Federal
Reserve continues to monitor developments in financial markets and
institutions closely and is in frequent contact with policymakers in
Europe and elsewhere.
Monetary policy must be responsive to changes in the economy and,
in particular, to the outlook for growth and inflation. As I mentioned
earlier, the recent data have indicated that economic growth during the
first half of this year was considerably slower than the Federal Open
Market Committee had been expecting, and that temporary factors can
account for only a portion of the economic weakness that we have
observed. Consequently, although we expect a moderate recovery to
continue and indeed to strengthen over time, the Committee has marked
down its outlook for the likely pace of growth over coming quarters.
With commodity prices and other import prices moderating and with
longer-term inflation expectations remaining stable, we expect inflation
to settle, over coming quarters, at levels at or below the rate of 2
percent, or a bit less, that most Committee participants view as being
consistent with our dual mandate.
In light of its current outlook, the Committee recently decided to
provide more specific forward guidance about its expectations for the
future path of the federal funds rate. In particular, in the statement
following our meeting earlier this month, we indicated that economic
conditions — including low rates of resource utilization and a subdued
outlook for inflation over the medium run — are likely to warrant
exceptionally low levels for the federal funds rate at least through
mid-2013. That is, in what the Committee judges to be the most likely
scenarios for resource utilization and inflation in the medium term, the
target for the federal funds rate would be held at its current low
levels for at least two more years.
In addition to refining our forward guidance, the Federal Reserve
has a range of tools that could be used to provide additional monetary
stimulus. We discussed the relative merits and costs of such tools at
our August meeting. We will continue to consider those and other
pertinent issues, including of course economic and financial
developments, at our meeting in September, which has been scheduled for
two days (the 20th and the 21st) instead of one to allow a fuller
discussion. The Committee will continue to assess the economic outlook
in light of incoming information and is prepared to employ its tools as
appropriate to promote a stronger economic recovery in a context of
price stability.
Economic Policy and Longer-Term Growth in the United States
The financial crisis and its aftermath have posed severe challenges
around the globe, particularly in the advanced industrial economies.
Thus far I have reviewed some of those challenges, offered some
diagnoses for the slow economic recovery in the United States, and
briefly discussed the policy response by the Federal Reserve. However,
this conference is focused on longer-run economic growth, and
appropriately so, given the fundamental importance of long-term growth
rates in the determination of living standards. In that spirit, let me
turn now to a brief discussion of the longer-run prospects for the U.S.
economy and the role of economic policy in shaping those prospects.
Notwithstanding the severe difficulties we currently face, I do not
expect the long-run growth potential of the U.S. economy to be
materially affected by the crisis and the recession if–and I stress
if–our country takes the necessary steps to secure that outcome. Over
the medium term, housing activity will stabilize and begin to grow
again, if for no other reason than that ongoing population growth and
household formation will ultimately demand it. Good, proactive housing
policies could help speed that process. Financial markets and
institutions have already made considerable progress toward
normalization, and I anticipate that the financial sector will continue
to adapt to ongoing reforms while still performing its vital
intermediation functions. Households will continue to strengthen their
balance sheets, a process that will be sped up considerably if the
recovery accelerates but that will move forward in any case. Businesses
will continue to invest in new capital, adopt new technologies, and
build on the productivity gains of the past several years. I have
confidence that our European colleagues fully appreciate what is at
stake in the difficult issues they are now confronting and that, over
time, they will take all necessary and appropriate steps to address
those issues effectively and comprehensively.
This economic healing will take a while, and there may be setbacks
along the way. Moreover, we will need to remain alert to risks to the
recovery, including financial risks. However, with one possible
exception on which I will elaborate in a moment, the healing process
should not leave major scars. Notwithstanding the trauma of the crisis
and the recession, the U.S. economy remains the largest in the world,
with a highly diverse mix of industries and a degree of international
competitiveness that, if anything, has improved in recent years. Our
economy retains its traditional advantages of a strong market
orientation, a robust entrepreneurial culture, and flexible capital and
labor markets. And our country remains a technological leader, with many
of the worlds leading research universities and the highest spending on
research and development of any nation.
Of course, the United States faces many growth challenges. Our
population is aging, like those of many other advanced economies, and
our society will have to adapt over time to an older workforce. Our K-12
educational system, despite considerable strengths, poorly serves a
substantial portion of our population. The costs of health care in the
United States are the highest in the world, without fully commensurate
results in terms of health outcomes. But all of these long-term issues
were well known before the crisis; efforts to address these problems
have been ongoing, and these efforts will continue and, I hope,
intensify.
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