NEW YORK – With labor market recovery expected to be slow, monetary policy “accommodation will likely be appropriate for some time,” Federal Reserve Bank of Chicago President and Chief Executive Officer Charles L. Evans said today.
“Headline employment indicators appear to be roughly following a conventional track given the severity of the recession. But these measures may not fully capture the weakness displayed in the rising unemployment duration and the withdrawal of workers from the labor force,” Evans said at the NABE Economic Policy Conference, according to prepared text released by the Fed. “These developments thus raise the risk that the recovery in labor markets could be slow even as output returns to a well-established growth path.”
Looking at productivity growth, Evans said, the large increases seen in the past few quarters could be the normal pattern following a recession, as companies increase their inventories without hiring.
“A key question today is the degree to which the recent productivity surge reflects a temporary cyclical development or a more enduring increase in the level or trend rate of productivity,” he said. “If the gains are predominantly driven by intense cost cutting, then they may be unsustainable once demand revives more persistently. In this case, we would expect hiring to pick up quickly as the economic expansion takes hold. However, if the level or trend in productivity has risen due to technological or other improvements, then higher average productivity gains will continue. In this case, the implications for hiring are not clear. Higher levels of productivity will show through in both higher potential and actual output for the economy, and so need not necessarily come at the cost of lower labor input.”
However, given the “sheer magnitude of unemployment today,” Evans said, “there is little doubt in my mind that there is considerable slack in the economy. Incorporating alternative views about productivity and labor market behavior do not alter this general conclusion. The debate really boils down to whether the amount of slack in the economy is large or is extremely large.”
While commending the Fed’s work, Evans noted that if more stimulus was needed, it like would have been expansion of the Large Scale Asset Purchases (LSAP) program. But uncertainty surrounds what such intervention would have accomplished, he said.
“Moreover, although it is impossible to quantify, a portion of the impact of our nontraditional actions may have come simply from boosting confidence,” he said. “In those very dark times, I believe households, businesses, and financial markets were reassured that policymakers were acting in a decisive manner. Further asset purchases would not have had an additional effect of this kind.”
Also, the cost of LSAP “could be considerable,” and would have added to the inflation fears caused by the Fed’s expanded balance sheet and “could have further complicated the exit process down the road.”
