* Housing, global demand undercutting U.S. economy - Fischer
* Worries about long-term productivity growth
By Howard Schneider
WASHINGTON, Aug 11 The U.S. and global
recoveries have been "disappointing" so far and may point to a
permanent downshift in economic potential, U.S. Federal Reserve
Vice Chair Stanley Fischer said on Monday.
In an overview of the years since the 2007-2009 financial
crisis and recession, Fischer said a slowing of U.S.
productivity, declining labor force participation and other
factors may have scarred the United States' ability to generate
The same thing may be happening for different reasons in
Europe, major emerging economies like China, and elsewhere, he
said, forcing central bankers to recast their understanding of
inflation, employment and growth in general.
"The global recovery has been disappointing," Fischer said
in prepared remarks for a speech to an economic conference in
Sweden. Long-run annual growth in the United States may now be
perhaps as low as 2 percent, a full percentage point below the
estimate of Fed policymakers as recently as 2009, he said.
Some of that may represent temporary factors that will
change if, for example, the U.S. housing market improves.
"But it is also possible that the underperformance reflects
a more structural, longer-term shift in the global economy,"
Fischer, the influential new No. 2 official at the U.S.
central bank, outlined the challenges facing monetary
policymakers as they try to navigate the end of the
unconventional methods used to support the economy in recent
It remains uncertain, he said, whether lower productivity
growth and lower labor force participation rates are now
permanent features of the U.S. economy - complicating estimates
of growth, inflation, and the amount of slack in labor and
The more than $4 trillion in assets now held on the Fed's
balance sheet, he said, will also make it more difficult to
manage short-term interest rates. He added that he believes the
Fed has developed a suite of tools, such as the interest paid on
overnight bank reserves, that will be successful in maintaining
a target rate.
Since the crisis, central bankers have also become more
concerned with what role they should play in ensuring financial
stability, an issue where Fischer has been an outspoken advocate
of aggressive central bank involvement.
He said macroprudential and regulatory tools should be a
country's first line of defense for financial stability -
regardless of whether those measures are employed by the central
bank or other agencies. The blunter tool of monetary policy -
raising interest rates to slow rapid growth, for example -
should be a last resort, he said.
But he acknowledged there were challenges.
If, for example, authority over some regulations rests with
other agencies, the central bank may be left trying to lobby for
their use. In the United States, the Fed is among the agencies
represented on the Financial Stability Oversight Council, for
example, but power is distributed among several agencies.
(Reporting by Howard Schneider; Editing by Paul Simao)