St. LOUIS (Reuters) - The U.S. economic recovery will likely be a long slog over several years and there is not a whole lot the Federal Reserve can do to speed the process, according to a top economist at the central bank.
“Something’s happened in U.S. labor markets that we can’t overcome,” St. Louis Federal Reserve Bank Research Director Christopher Waller told Reuters in an interview. “No matter what we do, recovery is going to be slow.”
Under President James Bullard, the St. Louis Fed has staked out the middle ground between officials who advocate all-out efforts to boost growth and those urging restraint out of fears easy money policies are setting the stage for inflation.
Bullard, who said on Tuesday that the Fed should refrain from a further easing of monetary policy unless the U.S. economy falters from its current modest growth pace, has become something of a bellwether for Fed policy.
The remarks from Waller late Tuesday, Bullard’s top policy adviser, illustrate a sense among some officials that the central bank has done what it can to lift the world’s largest economy and that there may be no shortcuts on the road to health after an unusually deep and wrenching recession.
“There’s no point in trying to say, ‘Cure cancer with monetary policy’,” he said. “It’s just not possible.”
The Fed cut overnight interest rates to near zero almost three years ago and bought $2.3 trillion in bonds in a further effort to try to boost growth.
More recently, it moved to lower long-term borrowing costs by shifting its bond holdings into longer maturities. In addition, it promised to hold rates at exceptionally low levels well into 2013 to assure markets that it will be in no hurry to raise rates when the economic skies start to clear.
Even with the Fed’s ultra-easy money stance and an economy poised to grow respectably over the next few months, the unemployment rate, which stood at 9 percent in October, will likely come down only gradually, Waller said.
He expects declines of roughly a half-percentage point a year, in line with the same slow pace that followed the previous two recessions.
“The pattern seems to be reemerging. (Unemployment) stays high and it just trickles down,” Waller said.
Fed economists are trying to understand why the U.S. job market no longer seem to manage the bold post-downturn advances of the past. Possible explanations include employer reluctance to rehire workers once they’ve been let go, as well as the deep cuts to construction jobs related to the crash of housing markets specific to the most recent recession, Waller said.
Fed Chairman Ben Bernanke has called the lofty level of unemployment a national crisis, and financial markets have begun to expect the U.S. central bank to launch a further round of asset purchases to push the sluggish recovery into higher gear next year.
But those expectations may be skewed by recent remarks from central bank officials representing an activist faction, such as Chicago Fed President Charles Evans and Fed Board Governor Daniel Tarullo, Waller said.
One growth-enhancing step policymakers have discussed is expanding purchases of mortgage-backed securities to help heal housing markets. MBS buying helped stop the decline in house prices in 2009, Waller said, but there are questions about whether the move would be as effective now as it was then.
“Now, we don’t see the economy going off a cliff, we don’t see the stock market crashing, we don’t see jobs disappearing by 700,000 a month, so the circumstances are different,” he said. With mortgage interest rates at rock-bottom levels, Waller said it is possible that pretty much anyone able and interested in buying a house has already bought one, so the only benefit would be in encouraging refinancing.
And although many view housing as an essential component of a more robust rebound, it may be unreasonable to expect that sector to rapidly regain any of its pre-crisis sparkle, he added. Housing oversupply and the slow pace of resolving problems from decimated home values will make the pace of recovery in this sector painfully slow, he said.
“It’s going to take a while to get this turned over,” Waller said. “We just have to accept that housing is moribund and we can’t expect it to get us out of this.”