Crisis & Response: Economic Recovery

Economic Recovery As the economy moves toward recovery the Fed will remain active in its response, including unwinding certain policies as conditions warrant. The economic outlook, why inflation is a topic of focus, and the changes in regulation needed to strengthen the financial markets are examined here.
Essential Questions
▼ What will the recovery look like? The recovery is likely to take longer than previous recoveries, with unemployment likely to remain elevated for years. Modest recovery in output After one of the worst global recessions since the 1930s, the economy is experiencing a modest recovery. Slow reduction in unemployment Given the expected modest pace of economic growth in the recovery, unemployment is likely to remain elevated for many years. Support from monetary and fiscal stimulus Federal government fiscal stimulus and Federal Reserve monetary policy helped reduce the severity of the downturn and promote recovery. » Learn more ▼ When will financial markets heal? Credit conditions are improving, but U.S. lenders continue to be cautious and financial markets worry about the level of foreign government debt. Stock markets recovering and bond yields normalizing Investors are once again willing to take on risk, contributing to a recovery in stock markets and lower interest rates on corporate bonds. Credit still tight The flow of credit remains tight as financial institutions and regulators develop appropriate lending standards. Risk remains from international increases in government debt There is a risk that foreign governments might default on their debt, which could further disrupt global financial markets. » Learn more ▼ How will the Fed maintain price stability? The Federal Reserve has the tools to keep prices stable and is committed to doing so. That means not allowing inflation to get too high or too low. Avoid deflation The recession has caused the inflation rate to fall to a low level. Moderate money supply growth Despite aggressive policy actions, the money supply has grown at a moderate rate. Remove accommodation when appropriate The Federal Reserve is committed to winding down monetary stimulus when needed to forestall inflation. » Learn more	• • • • • • • • • • Unlike the recovery following previous deep recessions (such as 1981-82), substantial headwinds are likely to keep the recovery modest. Consistent with international evidence that economies recover only slowly following financial crises, U.S. unemployment is likely to fall only slowly over time. Estimates by the Congressional Budget Office suggest that, in the absence of fiscal stimulus, output would have been even lower and unemployment higher. Stock markets in the United States and abroad have retraced a significant portion of the crisis losses. Banks have not yet unwound the tightening of credit standards put in place during the crisis. Borrowing costs have risen in countries where investors worry about government default, relative to countries perceived to be "safer," such as the United States. With enormous slack in the economy, inflation is likely to remain very low. Despite aggressive Federal Reserve actions, the money supply has been growing at only a moderate pace. The low interest rates prevailing today will not be appropriate when the economy regains its health. At some point, the Federal Reserve will need to raise interest rates and/or reduce the size of its balance sheet to avoid overheating the economy and stoking inflationary pressures.
Policymakers' Perspectives • • •
January 14, 2011 Two Key Questions About the Economic Recovery Eric Rosengren Federal Reserve Bank of Boston January 7, 2011 Thoughts on the Future Course of Monetary Policy Charles Evans Federal Reserve Bank of Chicago January 7, 2011 Economic Outlook and Monetary and Fiscal Policy Ben S. Bernanke Board of Governors January 17, 2011 The Scope and Responsibilities of Monetary Policy Charles Plosser Federal Reserve Bank of Chicago December 1, 2010 Fiscal Responsibility and Global Rebalancing Vice Chair Janet L. Yellen Board of Governors November 22, 2010 Monetary Policy, Labor Markets, and Uncertainty Narayana Kocherlakota - President Federal Reserve Bank of Minneapolis November 19, 2010 Emerging from the Crisis: Where Do We Stand? Chairman Ben S. Bernanke, Chairman Board of Governors November 19, 2010 Rebalancing the Global Recovery Chairman Ben S. Bernanke, Chairman Board of Governors November 18, 2010 My Perspective on Current Monetary Policy Sandra Pianalto, President Federal Reserve Bank of Cleveland November 18, 2010 Bubble, Bubble, Toil and Trouble: A Dangerous Brew for Monetary Policy Charles I. Plosser, President Federal Reserve Bank of Philadelphia November 12, 2010 Next Steps in Financial Regulatory Reform Daniel K. Tarullo, Governor Board of Governors November 14, 2010 Unemployment and Monetary Policy: Lessons from Half a Century Ago Jeffrey M. Lacker, President Federal Reserve Bank of Richmond November 8, 2010 Recent Decisions of the Federal Open Market Committee: A Bridge to Fiscal Sanity? Richard W. Fisher, President Federal Reserve Bank of Dallas