Economic Outlook, October 2012

Over the long run, the behavior of inflation can be directly influenced by the decisions of the central bank, while economic growth and labor market conditions are affected by a wide variety of factors outside of the central bank’s control. A persistently high unemployment rate doesn’t imply that the Fed needs to do more to achieve its congressional mandate; monetary policy cannot offset all of the ways in which various frictions impede the economy’s adjustment to shocks. There are several factors impeding a more rapid recovery in labor markets following the Great Recession: (1) the housing market is still coping with a large inventory overhang; (2) an adverse shift in the skill profile of available workers has intensified the reallocation and skill mismatch that typically follows a recession; (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. Growth will likely begin to firm later next year and continue to improve. Although the European recession poses risks for this outlook, household confidence in the United States is expected to slowly firm and bolster consumer spending as labor markets continue to heal.