NEW YORK – The “notably weak” economic recovery will continue, with “frustratingly slow” growth despite the Fed’s efforts because they lack complementary tax and spending policies, Federal Reserve Bank of San Francisco President and CEO John C. Williams said Tuesday.
“The U.S. economy has been growing for the past two-and-a-half years. Nonetheless, we are still suffering from the aftereffects of the worst recession of the post-World War II period,” he told a breakfast gathering in Vancouver, according to prepared text released by the Fed. “The economic recovery has been notably weak and the unemployment rate is still shockingly high. … I expect the pace of economic growth to be frustratingly slow and the unemployment rate to remain very high for years to come.”
The Fed, he said, is doing “everything” possible to propel growth. “We’ve pushed short-term interest rates about as far down as they can go. And our unconventional programs have pushed longer-term rates down as well. These are not magic. Lower interest rates alone can’t fix all the economy’s problems. But they do help. Conditions are far better today than they would be if the Fed hadn’t administered such strong medicine. What’s also needed are tax and spending policies that work together with Federal Reserve programs to stimulate the economy.”
"The level of unemployment is a national calamity that demands our attention," he said.
Especially needed, Williams said, are federal programs to assist the housing market. “Housing has been at the center of the crisis and is one of the big impediments to recovery.”
When the housing bubble burst, he said, “the resulting financial crisis unleashed at least four powerful forces that have sapped the recovery of its vigor.” Those forces: the destruction of household wealth, a depressed housing market, tighter credit, and “a legacy of uncertainty that clouds the future.”
“The collapse of house prices contributed to a decline in the wealth of households of some six-and-a-half trillion—that’s trillion with a ‘T’—dollars. And, with the financial system and economy on the brink, the stock market plummeted,” he said. “This one-two punch deprived households of both the means and the will to spend. So it’s hardly surprising that consumer spending has been subdued.”
In the past, housing typically drove recovery, but with “the housing market is mired in a historical state of depression,” the economy remains weak.
As for the uncertainty he sees, Williams said, “By almost any measure, uncertainty is high. Businesses are uncertain about the economic environment and the direction of economic policy. Households are uncertain about job prospects and future incomes. Political gridlock in Washington, D.C., and the crisis in Europe add to a sense of foreboding.” He added the San Francisco Fed has estimated “that uncertainty has reduced consumer and business spending so much that it has potentially added a full percentage point to the unemployment rate.”
But, despite these “obstacles,” the economy has shown “moderate” growth, he said. “Prospects are that it will continue to do so. This is a testament to the natural resilience of our economic system.”
Williams expects GDP to increase almost 2.5% this year and 3% next year, better than last year’s estimate of 1.75% growth, but not “enough to take a big bite out of unemployment.” He projects the unemployment rate to remain above “8% well into next year and still be around 7% at the end of 2014.” He sees inflation below 1.5% this year and next. “That would put inflation a bit below the rate of about 2% that most Fed policymakers consider healthiest,” he added.
“With inflation under control and unemployment so high, those guidelines tell us something most unusual: the federal funds rate should actually be in negative territory,” Williams said.
The biggest threat to the economy is Europe, he said. “European leaders have been working to solve this problem and they may be able to muddle through. But, if they fail, all bets are off,” Williams warned. “The agreement binding together the countries that use the euro could break up, sending shock waves through financial markets around the world. Under such circumstances, the United States could hardly escape unscathed.”
