Challenges to Economic Growth

The Fed’s decentralized, regional structure ensures that a wide range of perspectives from across the country inform its policy decisions, helps to insulate the Fed from the short-run pressures of electoral politics and contributes to the strong sense of collegiality that results in a high-quality, deliberative process for deciding the course of the nation’s monetary policy. Lacker has disagreed with his colleagues on the FOMC on three points: (1) he objects to issuing specific "forward guidance” on how long the federal funds rate will remain near zero; (2) he believes that increasing the size of the Fed’s balance sheet by purchasing mortgage-backed securities (MBS) is unlikely to improve growth without also causing an unwelcome increase in inflation; and (3) he would prefer that the Fed purchase Treasury securities rather than MBS. 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) political gridlock has created uncertainty, which 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.