Speaking at the Federal Reserve Bank of Kansas City Economic Symposium, Federal Reserve Chairman Ben Bermanke noted significant challenges faced by the economy in the long-term but highlighted optimism that the growth fundamentals remain in tact.
Even in light of substantial efforts by the Fed to fuel recovery from the recession, Bernanke said, the recovery has been weaker then expected and economic growth has not be sufficient to reach sustained reductions in unemployment. As the economy overcomes some temporary factors, such as a run-up in commodity prices on consumer and business budgets, and the impact of the Japanese disaster on global supply chains and production, he sees potential for increased growth in the second half of 2011.
The housing sector remains a significant drag in the economy as stability has been hindered by a continued inventory of distressed and foreclosed properties, tight credit conditions by lenders and on-going concerns regarding continued home price declines. New home construction remains at one-third the pace of pre-recession levels, which significant impacts the construction market, as well as, ancillary markets for goods and services. Declines in home prices have added stress on home owners and financial institutions as an increased percentage of mortgage loans have become underwater.
To continue to spur economic recovery, and a subdued threat of inflation, Bernanke noted that the Fed would likely be able to maintain low federal fund target rates.
In expressing optimism toward the future prospects, Bernanke stated a belief that long-term growth potential in the U.S. has not been materially affected by the recession crisis, as long as the country takes the necessary steps to secure that outcome. Housing activity will stabilize and begin growing from growing demand. Financial reforms continue to strengthen markets and are progressing towards normalization. Monetary policy must ensure that inflation remains low and stable to support long-run financial stability.
"The quality of economic policymaking in the United States will heavily influence the nation's longer-term prospects," Bernanke said. "To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies."
A major focus of policy makers must be on job creation in order to spur sustainable growth. Tax and spending programs should seek to increase incentives to work and save, create incentives for investments into workforce skills, promote research and development, stimulate private capital formation, along with providing necessary public infrastructure.
To accomplish these goals, policy makers need to develop a more effective process for making fiscal policies. The budget battle over the summer has significant impacts on the financial markets. Continued battles to set budgetary and fiscal battle could weaken global interest in U.S. investment. The process, Bernanke suggested, must set more clear and transparent budget goals and create meaningful mechanisms to accomplish the goals.
"Economic policymakers face a range of difficult decisions, relating to both the short-run and long-run challenges we face," he said. "I have no doubt, however, that those challenges can be met, and that the fundamental strengths of our economy will ultimately reassert themselves. The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability."
