NEW YORK – Noting that his forecast for growth of 3.0% in 2011 missed dramatically, Federal Reserve Bank of Richmond President Jeffrey M. Lacker said he sees a “growing sense that there are relatively persistent impediments holding back economic expansion,” especially the housing market.
Real GDP grew about 2.5% in the last half of 2011, about the average rate since the recession bottomed out. “To put this in perspective, consider that over the last century and a half real GDP has tracked remarkably close to a trend line representing growth at close to 3%,” Lacker told the Risk Management Association, according to prepared text of his remarks released by the Fed. “Apart from the Great Depression and World War II, deviations from trend have been relatively transitory, and recessions were followed by expansions at significantly greater than 3%. In fact, it was commonplace to see growth rates of 5% or 6% coming out of a sharp recession. In this recession, real GDP contracted by over 5%, and we have not closed the gap to that trend line. Instead of catching up, we appear to be tracking a new lower trend line.”
“Disappointingly slow growth often prompts calls for more central bank stimulus,” he said. “But monetary policy is given credit for entirely too much influence on real economic activity. Monetary policy is about inflation ¯ that is, the value of money. The effects of changes in monetary policy on real output and employment are largely the transitory byproducts of frictions that delay the timely adjustment of prices to changes in monetary conditions. Over time, these effects dissipate, and growth is governed almost entirely by the evolution of a society's technology, skills, resources and trading opportunities. The macroeconomic experience of 2011 provides vivid illustration; despite large-scale efforts to provide more monetary stimulus, growth disappointed and inflation moved upward.”
As for the economy, Lacker said, the “adjustment process” in the housing market could be “lengthy,” he said, “given sizeable oversupply and tighter credit standards.”
Another issue holding back growth is slow consumer spending, related to a weak employment market. Lacker also mentioned “the array of changes in tax and regulatory policy, both actual and anticipated,” as a source of economic slowness.
As a result, Lacker expects growth of 2% to 2.5% this year, with inflation near 2%.
Of course, there are risks, including Europe.
“I believe there is a chance that U.S. consumers could regain confidence at a more rapid pace and propel a stronger pickup in overall growth,” Lacker said.
