WASHINGTON (MNI) – The following are the remarks of Federal Reserve
Chairman Ben Bernanke prepared for Friday’s Sixth European Central Bank
Central Banking Conference in Frankfurt:
The global economy is now well into its second year of recovery
from the deep recession triggered by the most devastating financial
crisis since the Great Depression. In the most intense phase of the
crisis, as a financial conflagration threatened to engulf the global
economy, policymakers in both advanced and emerging market economies
found themselves confronting common challenges. Amid this shared sense
of urgency, national policy responses were forceful, timely, and
mutually reinforcing. This policy collaboration was essential in
averting a much deeper global economic contraction and providing a
foundation for renewed stability and growth.
In recent months, however, that sense of common purpose has waned.
Tensions among nations over economic policies have emerged and
intensified, potentially threatening our ability to find global
solutions to global problems. One source of these tensions has been the
bifurcated nature of the global economic recovery: Some economies have
fully recouped their losses while others have lagged behind. But at a
deeper level, the tensions arise from the lack of an agreed-upon
framework to ensure that national policies take appropriate account of
interdependencies across countries and the interests of the
international system as a whole. Accordingly, the essential challenge
for policymakers around the world is to work together to achieve a
mutually beneficial outcome–namely, a robust global economic expansion
that is balanced, sustainable, and less prone to crises.
The Two-Speed Global Recovery
International policy cooperation is especially difficult now
because of the two-speed nature of the global recovery. Specifically, as
shown in figure 1, since the recovery began, economic growth in the
emerging market economies (the dashed blue line) has far outstripped
growth in the advanced economies (the solid red line). These differences
are partially attributable to longer-term differences in growth
potential between the two groups of countries, but to a significant
extent they also reflect the relatively weak pace of recovery thus far
in the advanced economies. This point is illustrated by figure 2, which
shows the levels, as opposed to the growth rates, of real gross domestic
product (GDP) for the two groups of countries. As you can see, generally
speaking, output in the advanced economies has not returned to the
levels prevailing before the crisis, and real GDP in these economies
remains far below the levels implied by pre-crisis trends. In contrast,
economic activity in the emerging market economies has not only fully
made up the losses induced by the global recession, but is also rapidly
approaching its pre-crisis trend. To cite some illustrative numbers, if
we were to extend forward from the end of 2007 the 10-year trends in
output for the two groups of countries, we would find that the level of
output in the advanced economies is currently about 8 percent below its
longer-term trend, whereas economic activity in the emerging markets is
only about 1-1/2 percent below the corresponding (but much steeper)
trend line for that group of countries. Indeed, for some emerging market
economies, the crisis appears to have left little lasting imprint on
growth. Notably, since the beginning of 2005, real output has risen more
than 70 percent in China and about 55 percent in India.
In the United States, the recession officially ended in mid-2009,
and — as shown in figure 3 — real GDP growth was reasonably strong in
the fourth quarter of 2009 and the first quarter of this year. However,
much of that growth appears to have stemmed from transitory factors,
including inventory adjustments and fiscal stimulus. Since the second
quarter of this year, GDP growth has moderated to around 2 percent at an
annual rate, less than the Federal Reserve’s estimates of U.S. potential
growth and insufficient to meaningfully reduce unemployment. And indeed,
as figure 4 shows, the U.S. unemployment rate (the solid black line) has
stagnated for about eighteen months near 10 percent of the labor force,
up from about 5 percent before the crisis; the increase of 5 percentage
points in the U.S. unemployment rate is roughly double that seen in the
euro area, the United Kingdom, Japan, or Canada. Of some 8.4 million
U.S. jobs lost between the peak of the expansion and the end of 2009,
only about 900,000 have been restored thus far. Of course, the jobs gap
is presumably even larger if one takes into account the natural increase
in the size of the working age population over the past three years.
Of particular concern is the substantial increase in the share of
unemployed workers who have been without work for six months or more
(the dashed red line in figure 4). Long-term unemployment not only
imposes extreme hardship on jobless people and their families, but, by
eroding these workers’ skills and weakening their attachment to the
labor force, it may also convert what might otherwise be temporary
cyclical unemployment into much more intractable long-term structural
unemployment. In addition, persistently high unemployment, through its
adverse effects on household income and confidence, could threaten the
strength and sustainability of the recovery.
Low rates of resource utilization in the United States are creating
disinflationary pressures. As shown in figure 5, various measures of
underlying inflation have been trending downward and are currently
around 1 percent, which is below the rate of 2 percent or a bit less
that most Federal Open Market Committee (FOMC) participants judge as
being most consistent with the Federal Reserve’s policy objectives in
the long run. (1) With inflation expectations stable, and with levels of
resource slack expected to remain high, inflation trends are expected to
be quite subdued for some time.
Monetary Policy in the United States
With inflation expectations stable, and with levels of resource
slack expected to remain high, inflation trends are expected to be quite
subdued for some time.
Because the genesis of the financial crisis was in the United
States and other advanced economies, the much weaker recovery in those
economies compared with that in the emerging markets may not be entirely
unexpected (although, given their traditional vulnerability to crises,
the resilience of the emerging market economies over the past few years
is both notable and encouraging). What is clear is that the different
cyclical positions of the advanced and emerging market economies call
for different policy settings. Although the details of the outlook vary
among jurisdictions, most advanced economies still need accommodative
policies to continue to lay the groundwork for a strong, durable
recovery. Insufficiently supportive policies in the advanced economies
could undermine the recovery not only in those economies, but for the
world as a whole. In contrast, emerging market economies increasingly
face the challenge of maintaining robust growth while avoiding
overheating, which may in some cases involve the measured withdrawal of
policy stimulus.
(1 Figure 5 shows core and trimmed-mean measures to better display
the decline in underlying, or trend, inflation. Total inflation measures
have been volatile in recent years but are currently a bit above 1
percent on a 12-month basis. Projections by FOMC participants have
indicated that, under appropriate monetary policies, inflation as
measured by the price index for personal consumption expenditures should
converge to 2 percent or a bit less in the long run.)
Let me address the case of the United States specifically. As I
described, the U.S. unemployment rate is high and, given the slow pace
of economic growth, likely to remain so for some time. Indeed, although
I expect that growth will pick up and unemployment will decline somewhat
next year, we cannot rule out the possibility that unemployment might
rise further in the near term, creating added risks for the recovery.
Inflation has declined noticeably since the business cycle peak, and
further disinflation could hinder the recovery. In particular, with
shorter-term nominal interest rates close to zero, declines in actual
and expected inflation imply both higher realized and expected real
interest rates, creating further drags on growth. (2) In light of the
significant risks to the economic recovery, to the health of the labor
market, and to price stability, the FOMC decided that additional policy
support was warranted.
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** Market News International Washington Bureau: 202-371-2121 **
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