In a widely-anticipated speech, Federal Reserve Board Chairman Ben Bernanke touched on some of the short-run and long-run challenges impacting the U.S. economy. While not laying out any new policy initiatives on the part of the Federal Reserve, he did discuss the current economic environment and reiterated the need for the Fed to keep interest rates exceptionally low through mid-2013, as announced at the Federal Open Market Committee meeting earlier this month.
His remarks were part of an economic symposium focusing on long-term growth organized by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. Much of the focus earlier in his speech was on the causes of the Great Recession – namely, the “freezing of credit, the sharp drops in asset prices, dysfunction in financial markets, and the resulting blows in confidence that sent global production and trade into free fall in late 2008 and early 2009.”
He once again reiterated the extraordinary actions taken to avert a financial crisis at that time and noted a number of improvements, especially in terms of the health of the banking system, since then.
Manufacturers, of course, have been instrumental in the economic recovery since the recession officially ended, and he noted their contribution:
“In the broader economy, manufacturing production in the United States has risen nearly 15 percent since its trough, driven substantially by growth in exports. Indeed, the U.S. trade deficit has been notably lower recently than it was before the crisis, reflecting in part the improved competitiveness of U.S. goods and services. Business investment in equipment and software has continued to expand, and productivity gains in some industries have been impressive….”
The Chairman noted that the manufacturing sector has suffered from a number of “temporary factors,” such as the “run-up in commodity prices” and the supply chain disruptions stemming from the Japanese disaster. And yet, other factors appear to be at work, which have dampened growth. Several of the larger headwinds, for instance, continue to be weaknesses in the housing sector, financial obstacles in Europe, anxiety among businesses and consumers and the U.S. fiscal situation.
The Federal Reserve’s role is to promote “monetary policy that ensures that inflation remains low and stable over time” and “fosters macroeconomic and financial stability in its role as a financial regulator, a monitor of overall financial stability, and a liquidity provider of last resort.”
Of course, the Fed is also responsible for helping to foster economic growth and employment. On that score, he noted the high levels of long-term unemployment, and he implored policymakers to address a number of long-term challenges. These include seriously addressing our large budget deficits and debt, “proactive housing policies” that help to stabilize that sector, improving our educational and health care systems, and advancing fiscal policy solutions that promote growth. On this latter point, he says:
“To the fullest extent possible, our nation’s tax and spending policies should increase incentives to work and save, encourage investments in the skills of our workforce, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. We cannot expect our economy to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs we face.”
Overall, this was an interesting speech discussing the current macroeconomic challenges we face as a nation. On that score, it provides a nice lesson on economics, while also giving us an insight into the Chairman’s thinking. While no new monetary policy actions were announced – frustrating some who were hoping for something more stimulative – it was still instructive. The Fed has already announced keeping rates at near-zero for two more years and short of announcing a new round of quantitative easing, there is little else that it can do.
Chad Moutray is chief economist, National Association of Manufacturers.