NEW YORK – The recession is over and the recovery has begun, “but there is much work to be done,” Federal Reserve Bank of Chicago President Charles L. Evans said today.
“Is the recession really over? In a narrow, technical sense, the short answer is yes,” Evans told the Corridor Economic Forecast Luncheon in Iowa, according to prepared text of the speech, which was released by the Fed. “Many broad indicators of economic activity are increasing as we would expect in the early stages of a recovery. Nonetheless, I keep hearing the question because for many households and businesses it does not yet feel like much of a recovery. Unemployment remains very high, and many businesses are still producing and selling much less than they did two years ago. I think what people really want to know is when will we make significant progress in returning unemployment and other measures of economic health to more normal levels? We appear to be moving in that direction, but there is much work to be done.”
The signs of the recovery, Evans said, include GDP, which rose in the third quarter after four quarters of declines, and while government stimulus spending accounted for a portion of this, “private demand is beginning to firm up as well.”
Housing has been mixed, as buyers react to lowered prices and low interest rates. The fall in prices has hit the economy in a different way, with consumers cutting spending as household wealth drops. Also, unemployment has stunted growth in wages and salaries.
“Employment is often the last piece of the puzzle to fall into place during a recovery,” he said. “This will certainly be true this time. Many businesses slashed payrolls during the recession, and going forward, many are hoping to keep staffing levels lean. Indeed, even though output was increasing, employment still fell substantially during the second half of 2009.”
Yet, sign appear that some hiring, especially of temporary workers has begun. “I think that many businesses already are finding they can take lean production only so far,” Evans said. “These firms should be ready to expand permanent hiring once they see clearer signs of sustained increases in demand.”
Bank credit tightening, and companies’ reluctance to add to their debt, have cut down on lending. But, Evans said, “I expect banking conditions to improve, but this is likely to take some time.” Meanwhile, “restrictive bank credit, along with business and household caution, will continue to restrain the recovery’s strength,” he said. “Nevertheless I expect these headwinds to abate as we move through 2010.”
Evans expects inflation to remain relatively stable. While low rates of resource utilization and high unemployment point to lower inflation, the Fed’s expanded balance sheet and the related increase in the monetary base would portend higher inflation.
“We all know that too much money chasing too few goods will generate inflation,” he said. “But, currently, most of the increase in the monetary base is sitting idly in bank reserves—and because banks are not lending those reserves, they are not generating spending pressure. Of course, leaving the current highly accommodative monetary policy in place for too long would eventually fuel inflationary pressures.”
Evans warned, “monetary policy cannot be passive.” He said it will be challenging to judge “the appropriate timing and pace for reducing accommodation. On the one hand, removing too much accommodation prematurely could choke off the recovery. On the other hand, as I noted, if the Fed leaves the current level of accommodation in place too long, inflationary pressures eventually will build. The Fed is preparing for these decisions by carefully monitoring business activity and remaining alert for signs of incipient inflation. In addition, the FOMC is making sure that it has the technical tools it will need when it decides to reduce monetary accommodation. Overall, I am confident that monetary policy will bring and keep inflation near my guideline of 2% over the medium term.”
The lessons learned from the recent crisis, include the need for nontraditional tools and that financial market supervision needs to be based on prospective economic conditions, applied at the same time across the range of institutions.
