Lacker on the Economy

Inflation has performed very close to what the Fed views as consistent with its statutory mandate. Inflation has averaged 2.03 percent per year since 1992, and 1.90 percent since June 2009, compared to the Fed's long-run goal of 2 percent average inflation. Temporary swings above and below that threshold have tended to even out over time, a substantial improvement over previous decades. Maintaining price stability is the Fed's primary mission as the central bank. In contrast, real economic growth and labor market conditions are affected by many factors beyond the central bank's control. The effects of monetary stimulus on real output and employment often are smaller than is widely thought. Several factors seem to be impeding a more rapid recovery from the Great Recession: (1) the residential inventory overhang; (2) the need to reallocate labor and other resources across sectors; (3) heightened consumer caution in the wake of the Great Recession; and (4) uncertainty, including over fiscal policy, that has caused businesses to delay investment and hiring decisions. It is reasonable to expect that gross domestic product will grow at an annual pace of 2 percent in 2013. This forecast is based on a number of factors: progress on federal budget issues; improvement in economic conditions in Europe; and gradual gains in consumer confidence.