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Federal Reserve's vice-chair warns of long-term damage from recession
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Federal Reserve's vice-chair warns of long-term damage from recession

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Federal Reserve's vice-chair warns of long-term damage from recession

"Disappointing" economic recoveries may point to a permanent downshift in the potential of powerhouses such as the US, Europe and China, the vice-chairman of the US Federal Reserve has warned.

Speaking on Monday to a conference in Sweden about the years since the financial crisis and Great Recession, Stanley Fischer said falling rates of productivity and labour force participation in the US among other factors may have scarred the country's ability to generate economic growth.

The same thing may be happening for different reasons in Europe, large emerging economies such as China, and elsewhere, he said, forcing central bankers to recast their understanding of inflation, employment and growth in general.

"The global recovery has been disappointing," Fischer said, adding that long-run annual growth in the US may now be as low as 2%, a full percentage point below the estimate of Fed policymakers as recently as 2009.

Some of that may represent temporary factors that will change if, for example, the US housing market improves.

"But it is also possible that the underperformance reflects a more structural, longer-term shift in the global economy," he added.

Fischer, the influential new number two at the US central bank, outlined the challenges facing monetary policymakers as they try to navigate the end of the unconventional methods such as quantitative easing (QE) used to support the economy in recent years.

It remains uncertain, he said, whether lower productivity growth and lower labour force participation rates are now permanent features of the US economy – complicating estimates of growth, inflation, and the amount of slack in labour and product markets. Over the past six years more than 3% of the US labour force has dropped out of the economy, according to the Bureau of Labour Statistics.

The more than $4tn (£2.3tn) in assets now held on the Fed's balance sheet as a result of QE, he said, will also make it more difficult to manage short-term interest rates.

He added that he believed the Fed had developed a suite of tools, such as the interest paid on overnight bank reserves, that will be successful in maintaining a target rate.

Since the crisis, central bankers have become more concerned with what role they should play in ensuring financial stability, an issue where Fischer has been an outspoken advocate of aggressive central bank involvement.

He said macroprudential and regulatory tools should be a country's first line of defence for financial stability, regardless of whether those measures are employed by the central bank or other agencies. The blunter tool of monetary policy – raising interest rates to slow rapid growth, for example – should be a last resort, he said.

But he acknowledged there were challenges.

If, for example, authority over some regulations rests with other agencies, the central bank may be left trying to lobby for their use. In the US, the Fed is among the agencies represented on the Financial Stability Oversight Council, for example, but power is distributed among several agencies.

Federal Reserve's vice-chair warns of long-term damage from recession | Business | The Guardian

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