The Federal Reserve is close to meeting both its targets for the US economy, one of its leading policymakers said, as he delivered an upbeat verdict on the post-crisis recovery.
Stanley Fischer, the vice-chairman of the Federal Reserve’s Board of Governors, said core inflation was within “hailing distance” of the central bank’s 2 per cent target, while employment had increased “impressively” since its nadir in 2010.
Mr Fischer has occupied the more hawkish end of the spectrum among the permanent members of the rate-setting Federal Open Market Committee. He did not address the question of when the Fed should next lift short-term interest rates in his speech in Aspen, Colorado.
However his confident assessment will attract the scrutiny of traders seeking to untangle the views of a heavily divided body of US policymakers.
“We are close to our targets. Not only that, the behaviour of employment has been remarkably resilient,” Mr Fischer said.
In his speech Mr Fischer spelt out the speed bumps that the US has had to confront in the past two years. These have included the Greek debt crisis, the 20 per cent rise of the trade-weighted dollar, uncertainties over China’s exchange rate policy, bouts of financial market turbulence, a “dismaying pothole” in job growth in May of 2016, as well as the UK’s Brexit vote.
“Yet, even amid these shocks, the labour market continued to improve: employment has continued to increase, and the unemployment rate is currently close to most estimates of the natural rate,” Mr Fischer said.
“I believe it is a remarkable, and perhaps under-appreciated, achievement that the economy has returned to near-full employment in a relatively short time after the Great Recession, given the historical experience following a financial crisis.”
That said, one of the disquieting developments of recent years is the sharp slowdown in US productivity growth. In the second quarter labour productivity recorded its third consecutive quarterly drop — the first time such a string of declines has happened since 1979.
Mr Fischer pointed out that output per hour increased only 1.25 per cent a year on average from 2006 to 2015, compared with its long-run average of 2.5 per cent from 1949 to 2005. That slowdown was a “massive change” and if it were to persist it would have implications for employment, wage growth and broader economic policy.
However, while some economists have warned that the US could remain trapped in a prolonged period of sagging productivity growth, Mr Fischer gave a more positive prediction.
In a footnote to the text of his speech, he said: “There is no shortage of views on this issue among economists, but the views to some extent appear to depend on whether the economist making the prediction is an optimist or a pessimist.
“For the record, I note (a) that looking ahead, I expect GDP growth to pick up in coming quarters, as investment recovers from a surprisingly weak patch and the drag from past dollar appreciation diminishes, and (b) that I am an optimist.”
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