Analysis: Time for Fed to accept that U.S. growth not what it used to be?

Wed Nov 13, 2013 2:10pm EST
 
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By Jonathan Spicer and Ann Saphir

NEW YORK/SAN FRANCISCO (Reuters) - Year after year Federal Reserve policymakers have clung to a belief that the U.S. economy will soon regain its pre-recession stride. And year after year they have been wrong.

Now a growing number of economists and at least one top Fed official think Americans should lower their expectations.

They argue gross domestic product is more likely to grow at a 2 percent annual rate, rather than 3 percent or more, given the retirement of baby boomers and the extent to which the Great Recession discouraged workers and badly damaged industries such as finance and construction.

If they are right, the heyday of booming U.S. productivity might have passed, and the central bank's aggressive monetary policies may be misdirected and possibly even harmful. If the Fed keeps policy too easy for this more muted economy, it could lead to runaway inflation and asset bubbles.

In the five years since the depths of the financial crisis, the Fed has slashed interest rates to near zero and bought more than $3.8 trillion of bonds to spur consumer and business credit and a recovery in employment and economic growth.

"This sense that real GDP growth is going to pick up soon - I'm very skeptical about that," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said earlier this month, citing among other things consumers' apprehension about the effects of another deep recession.

"I know it's a popular forecast, but I'm skeptical," said Lacker, who has long opposed the Fed's very easy policies. "I see 2 percent growth ahead."

Most of his colleagues at the central bank disagree.   Continued...

 
An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst