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Fed adviser warns of slow recovery

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Section: News

April 8, 2011

The economy is making slow progress in its recovery, and unemployment will most likely remain high for several months, a senior official at the Federal Reserve Bank of Boston said on Wednesday evening in Rapaporte Treasure Hall.

Jeffrey C. Fuhrer, Executive Vice President and Senior Policy Adviser of the Federal Reserve Bank of Boston said that until GDP growth rises significantly above 3 percent, unemployment will remain high.

“The economy is growing and creating jobs slowly by historical standards for a recovery,” Fuhrer said. “Unemployment is high and is likely to remain so for some time.”

Fuhrer explained that although the unemployment rate has declined recently, the number of people in the labor force has also declined.

A decreasing labor force can be a sign of workers who are seeking work, but have recently gotten discouraged and do not count in the labor force, even though they are still unemployed.

Although some unemployment may simply be “structural,” Fuhrer said that he believed must unemployment now was the result of extended unemployment benefits, “house lock”, and geographical differences between jobs and where the unemployed people are living.

The housing market will also not be able to fully recover until housing prices stop declining, Fuhrer said. Until people see constant or rising prices, they will have no incentive to invest.

Fuhrer also attributed the slow economic recovery to a lack of confidence about investing in foreign markets, particularly in Greece, Spain and Ireland.

Although individual firms may hire or let go large numbers of employees in one quarter, Fuhrer said that only the net gain is important for the economy because each quarter there are millions of both job gains and losses.

When asked about the current debate in Washington about the national budget, Fuhrer said that the Federal Reserve typically tries to stay out of political decisions and instead tries to focus on “sensible economic decisions.”

The Federal Reserve has also faced an unexpected challenge from the recent economic recovery.

“What we learned is that doing monetary policy in a very low inflation environment is not as easy as we thought,” Fuhrer said.

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