Monday, August 29, 2011

Insight on the Fed’s View of Economic Conditions

Chairman Bernanke at the Jackson Hole conference offered some insight on the Fed’s view of economic conditions and policy on Friday August 26. He believes that coming out of the most severe financial crisis since the Great Depression has been difficult, slow but we have seen significant positive developments. Globally, economic growth ed by emerging economies has been strong, but the US economic recovery has been slower than desired. The financial system has recovered nicely and is strong today as a result of important and necessary changes to regulation of risk taking. Lending to small and medium size business has been tight. Manufacturing production has risen sharply. The recovery has been too slow to bring unemployment down; in particular the housing industry that often recovers quickly from a recession has been slow due to the hangover of foreclosed homes. The significant decline in home prices has been a large drop in consumer wealth and this has depressed consumer spending.

Looking forward, the Fed believes the recovery will continue at a slow pace and inflation will stay below 2%. In response, the Fed will act to keep short term interest rates very low for the next two years. In the longer run analysis, the Fed believes its policy has its greatest impact on inflation. As a result the Fed will monitor economic conditions, attempt to stimulate short term expansion, but it recognizes this expansionary policy can not be maintained without a threat to longer term inflation.

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