While many economic forecasters predict real gross domestic product will grow at a 3% pace this year and a 4% pace in 2011, Federal Reserve Bank of Minneapolis president Narayana Kocherlakota said yesterday he believes growth will be a little slower, averaging 3% over the next two years.
“This pessimism derives from two sources,” Kocherlakota told the Allied Executives Business and Economic Outlook Symposium in Minneapolis, according to a prepared text of his remarks released by the Fed.
The Minneapolis Fed’s statistical forecasting model calls for growth of around 2.5% a year.
Additionally, “there is a great deal of uncertainty related to major policy initiatives under consideration in Washington,” he said. “I view this kind of political uncertainty as problematic for the prospects of rapid recovery.”
Also, if banks don’t start lending, it “would curtail the recovery,” Kocherlakota said.
“Even worse, as we saw in the thrift crisis of the 1980s, in the presence of deposit insurance, banks that are near failure have strong incentives to make poor loans. This outcome would be even worse for the economy.”
“The outlook for unemployment is not comforting,” he said.