Occasionally, we publish blog posts, statements and other commentaries of interest to the Washington business community. Here is an edited transcript of a Jan. 4 speech to Maryland bankers by the president of the Federal Reserve Bank of Richmond, offering his outlook on the economy.
This traditionally is a time to reflect on the year just past and take a look at what the new year might hold in store.
Since the Great Recession officially bottomed out at the end of the second quarter of 2009, economic activity has expanded at only a modest pace.
Several factors appear to be impeding a more-rapid expansion in the economy. First, the housing boom created a substantial oversupply of new homes, and while significant progress is evident, we have not completely worked through that oversupply. Prices in many markets bottomed out and have begun to rise, and new construction activity has been steadily improving. Having said that, my sense is that there is a substantial overhang of homes that are a poor match for what consumers want and can afford right now.
A second, and related, factor behind the slow recovery was the significant shift in economic activity away from industries related to residential construction. The rapid loss of jobs in these industries, layered on top of ongoing longer-run sectoral shifts, resulted in large inflows into the ranks of the unemployed and an adverse shift in the composition of the pool of unemployed.
Third, the recession appears to have made many consumers more cautious and less willing to spend, relative to their income and wealth. So while consumer spending has grown during this recovery, the tempered pace of that growth has limited the overall pace of the expansion.
Finally, our [regional] business contacts have long been emphasizing that uncertainty has caused them to delay hiring and investment commitments. These reports became more frequent this past spring and more focused on the uncertainties related to the year-end “fiscal cliff.”
My best guess is that growth will continue into next year at an annual rate of around 2 percent, as many of the recent impediments to faster growth continue to restrain activity. Beyond 2013, the rate of growth could rise if the effects of these restraining factors ease, which seems plausible. Meaningful progress on federal budget issues would alleviate some of the policy uncertainty. The risks emanating from Europe could diminish this year as it emerges from a recession and makes progress toward new institutional arrangements.
What role does monetary policy play in this outlook?
At its December meeting, the [Federal Open Market Committee] adopted measures to attempt to bolster economic growth. It also underscored its attention to real economic activity and employment by stating its forward guidance for interest rate policy in terms of a 6.5 percent threshold for the unemployment rate.
I dissented from these committee actions. At some point, we will need to withdraw stimulus by raising interest rates and reducing the size of our balance sheet, and the larger our balance sheet, the more vulnerable we will be to seemingly minor miscalibrations in policy. Accordingly, I see an increased risk, given the course the Committee has set, that inflation pressures emerge and are not thwarted in a timely way. I intend to remain alert for signs that our monetary policy stance needs adjustment.
Jeffrey M. Lacker is president of the Federal Reserve Bank of Richmond, which has responsibility for the Washington area. This transcript comes from his remarks posted online.