Fed’s Rosengren, Harvard’s Summers offer cautious view of US economy

Monday, 5 January 2015 00:00 - - {{hitsCtrl.values.hits}}

Reuters: As the Fed winds down its economic stimulus, former US Treasury Secretary Lawrence Summers says the country’s next economic booster could be exporting its fossil fuels around the globe, a move that could make America the next Saudi Arabia.

“The United States has the chance to be to the energy economy of the next decade what Saudi Arabia has been for the last two to three decades,” Summers said on Saturday. “The effect of allowing oil exports ... would reduce rather than increase American gasoline prices.” Summers, known for his outspoken views about what he describes as a disappointing US economic recovery, made his remarks at the annual American Economics Association conference. Meanwhile, at the same conference, Boston Federal Reserve President Eric Rosengren said low inflation rates across the world and only small amounts of wage and price pressure in the United States should force the Federal Reserve to move slowly as it pulls back on its accommodative monetary policy. Rosengren repeated his call for the US central bank to take its time in establishing more normal policy after years of stimulus to boost the economy. “I believe the continued very low core inflation and wage growth numbers provide ample justification for patience,” Rosengren said. “A patient approach to policy is prudent until we can more confidently expect that inflation will return to the Fed’s 2% target over the next several years.” Summers, a Harvard economics professor, reiterated how he is unsatisfied with the progress of the US economy. “The United States is now about 10% below potential, as it was estimated in 2007,” Summers said. “In so far as the output gap has closed, it is not because we have gotten closer to what we thought potential was. It is because we have revised downwards our assessment of the economy’s potential. That 10 percent potential represents about $20,000 per American family.” The comments of Rosengren and Summers come as Fed chair Janet Yellen lays the groundwork for the Fed’s first interest rate hike in nearly a decade. The Fed changed its interest rate guidance last month at its policy setting meeting, adding language in its statement that the central bank is moving closer to raising rates. While the Fed is widely expected to begin its lift-off sometime in the middle of this year, officials like Rosengren have advocated for a slow and steady process. That approach goes counter to other Fed officials who are arguing that the central bank has waited too long in keeping rates near zero, where they have been since December 2008. Summers advocates that the United States spend about 1% of GDP on public infrastructure improvements. He said current net public investment in infrastructure is now less than 1% GDP. “It is less than half what it averaged in the post World War II period,” Summers said. Rosengren said in his remarks that the last time the Federal Open Market Committee (FOMC) raised rates after a recession in June of 2004, the unemployment rate was at 5.6%, below the current 5.8%, and inflation was at 2.8% – well above its current reading of 1.2%. “Some worry that patience will mean deferring the first rate increase until well past the arrival of economic conditions that historically result in tightening,” Rosengren said. “But I would point out that we have some way to go before reaching those conditions, and so have not been unusually patient as yet.”