Some at Fed worry prolonged weakness hurting economy's potential

WASHINGTON Wed Feb 20, 2013 2:36pm EST

WASHINGTON Feb 20 (Reuters) - The weakest U.S. economic recovery in recent memory could be damaging the country's long-term growth potential, according to a number of Federal Reserve officials.

Policymakers at the central bank expressed such concerns at their Jan. 29-30 policy meeting, according to minutes of the meeting released on Wednesday.

"A number of (meeting) participants thought that the growth of potential output had been reduced in recent years, possibly in part because restrictive financial conditions and weak economic activity in the aftermath of the financial crisis had reduced investment, business formation, and the pace of adoption of new technologies," the minutes said.

"Many of these participants worried that, should the economy continue to operate below potential for too long, reduced investment and underutilization of labor could further undermine the growth of potential output over time," the report added.

Before the Great Recession of 2007-2009, economists generally pegged potential U.S. growth around 2.5 percent.

Lower potential growth implies less unused capacity in the economy, and therefore might call for tighter monetary policy than would otherwise be the case. At the same time, for those who believe the policy response to the economy's troubles has been too meek, the threat of lower potential output could serve as an impetus for more stimulus, not less.

Some economists have argued that a slumbering U.S. labor market has fallen prey to longer-term structural issues, like skills and geographical mismatches, that make the problem less amenable to help from monetary policy.

However, Fed Chairman Ben Bernanke, while acknowledging some possible structural effects, has argued that the weakness of the business cycle is the primary cause of the country's elevated 7.9 percent jobless rate.

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