Banking

The sluggish economic recovery in recent years has raised concerns about the U.S. economy's long-term growth prospects, noted Federal Reserve Chairman Ben Bernanke in an August 26 speech, but "the healing process should not leave major scars," he said.

The chairman discussed the near- and long-term prospects for the economy at the Kansas City Fed's annual economic policy symposium in Jackson Hole, Wyoming.

The pace of economic growth coming out of the recession has been slower than in previous recoveries, partly a result of the global nature of the downturn and the fact that it was accompanied by a deep financial crisis and housing slump. These factors combined "have acted to slow the natural recovery process," Bernanke explained.

"Quality" economic policymaking essential to long-term growth
Despite numerous challenges, the U.S. economy has several underlying strengths working in its favor, including its status as the world's largest economy. It also benefits from flexible capital and labor markets, a robust entrepreneurial spirit, and a leading edge in technology. These strengths will play an important role in determining the country's economic path, but so too will the quality of its economic policymaking, Bernanke said.

Many of the policies needed to support long-term economic growth are beyond the Fed's realm, however. Fiscal policymakers in particular must balance the goals of setting the nation's fiscal policy on a sustainable path while avoiding actions that jeopardize the fragile recovery.

Bernanke listed the key objectives for the nation's tax policies and spending programs, including creating incentives to work and to save, stimulating investments in workforce skills, promoting research and development, encouraging private capital formation, and building essential public infrastructure.

Importantly, the chairman stressed the need for a better process of fiscal policymaking. Pointing to the recent protracted negotiations in Congress over raising the debt limit, he said that similar events in the future could jeopardize the country's economic and financial prospects.

Fed prepared to act, if needed
In terms of monetary policy, the Fed will continue to do its part to support the recovery, Bernanke said, highlighting the recent Federal Open Market Committee (FOMC) decision to give more clarity to its so-called "forward guidance." Following its August meeting, the FOMC said that it would keep the federal funds rate at "exceptionally low levels" through at least mid-2013. Further, the FOMC is "prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability," he said.

Despite the difficulties confronting the U.S. economy, Bernanke expressed confidence "that those challenges can be met, and that the fundamental strengths of our economy will ultimately reassert themselves."

August 31, 2011