Economic Outlook

While maintaining price stability is the responsibility of the Federal Reserve, real economic growth and labor market conditions are affected by many factors beyond the Fed’s control. The effects of monetary stimulus on real output and employment often are smaller than is widely thought. The Fed’s actions to increase the quantity of reserves held by the banking system by buying securities are unlikely to strengthen the economic recovery. Moreover, the Fed’s purchase of mortgage-backed securities will lead to market distortions and inappropriately involves the Fed in the allocation of credit, a responsibility held by the legislative and executive branches. There are several factors impeding a more rapid recovery following the Great Recession: (1) the housing market is still coping with a large inventory overhang; (2) significant retraining has been required for many laid-off workers to find new employment in other sectors of the economy, and capital investment is often required when workers move to new sectors; (3) many consumers are more cautious and less willing to spend, relative to their income and wealth; and (4) uncertainty has caused businesses to delay hiring and investment commitments, and progress on federal budget issues will be necessary to reduce uncertainty. Headline inflation will likely average 2 percent during the next year or two. It is reasonable to believe that the economy will grow at an annual rate of 2 percent or slightly higher during coming months, with growth firming toward the end of 2013.