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Fed Official Warns ‘Disappointing’ Growth Could Foretell Future

Posted 08/11/2014 7:17 pm by

The Fed vice chairman Stanley Fischer. He says that the weak recovery might signal a structural shift in the global economy. Credit Yuri Gripas/Reuters

Sounding a somber note even as the economic outlook in the United States brightens, the Federal Reserve’s No. 2 official acknowledged on Monday that global growth had been “disappointing” and warned of fundamental headwinds that might temper future gains.

 

The official, Stanley Fischer, who took over as vice chairman of the Fed in June, noted that although the weak recovery might simply be fallout from the financial crisis and the recession, “it is also possible that the underperformance reflects a more structural, longer-term shift in the global economy.”

 

 

“Year after year, we have had to explain from midyear on why the global growth rate has been lower than predicted as little as two quarters back,” he said. “This slowing is broad-based, with performance in emerging Asia, importantly China, stepping down sharply from the postcrisis surge, to rates significantly below the average pace in the decade before the crisis.”

 

Mr. Fischer said it was difficult to determine how much of the slackness was because of cyclical factors and how much represented a more fundamental, structural change in advanced economies.

 

But he warned of three pronounced headwinds that have held back growth in the United States: a still anemic housing market, cuts in federal government spending and weaker global growth that reduced demand for American exports.

 

A report on Monday by the Organization for Economic Cooperation and Development warned that German economic growth might be slowing. Germany has been one of Europe’s rare bright spots, continuing to prosper even as countries on the periphery like Greece, Portugal and Spain struggle after the debt crisis of 2010-12.

 

After a very weak start to the year amid harsh wintry weather, economic growth in the United States has been increasing. Economists estimate that the American economy expanded at an annual rate of 4 percent in the second quarter, and are looking for the growth rate to remain at around 3 percent for the rest of 2014.

 

As a result, despite Mr. Fischer’s cautious tone on Monday, the Fed is planning to begin raising short-term interest rates next year, the first time it has tightened monetary policy since the onset of the recession.

 

On Wall Street, Mr. Fischer’s caution was not greeted negatively. Some traders were encouraged that it appeared that the Fed was in no rush to raise interest rates.

In addition to the three headwinds Mr. Fischer blamed for slowing growth in the last five years, he cited several long-term factors that could inhibit prosperity in the future.

 

One major worry is the slowing growth in the size of the American labor force, both because of demographic factors like the retirement of baby boomers and the legions of workers who have given up looking for jobs.

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2 responses to Fed Official Warns ‘Disappointing’ Growth Could Foretell Future

  1. Fed Official Warns ‘Disappointing’ Growth Could Foretell Future « Truth Is Rising August 11th, 2014 at 10:51 pm

    […] Fed Official Warns ‘Disappointing’ Growth Could Foretell Future […]

       

  2. James K. Galbraith - The End of Normal: The Great Crisis and the Future of Growth - Henk-Jan van der Klis December 14th, 2014 at 11:01 am

    […] Fed Official Warns ‘Disappointing’ Growth Could Foretell Future […]

       

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