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Philly Federal Reserve CEO: Economy on the mend

The U.S. economy is recovering at a moderate growth rate and will continue to do so this year and next year, said Charles Plosser, CEO and president of the Federal Reserve Bank of Philadelphia.

Plosser was the keynote speaker this morning at the Harrisburg Regional Chamber and Capital Region Economic Development Corp.‘s breakfast titled “From Recession to Expansion: A Policymaker’s Perspective.” It took place at the Sheraton Harrisburg-Hershey hotel in Swatara Township.

The economy began recovering in mid-2009; but as it started rebounding, the European economy faltered and economists thought overseas markets would cause the U.S. market to tumble, Plosser said.

“European debt made everyone think there would be a double dip (in the U.S. economy),” Plosser said.

The U.S. economy has seen a steady growth rate of 3.5 percent and it will continue to grow at that rate through 2012, Plosser said. The unemployment rate fell to 8.9 percent last month, and it should drop to 7.5 percent by the end of next year, he said. That figure is high, but it is decreasing and that is a good sign, Plosser said. The unemployment rate hit a peak in November, he said.

One of the brightest spots in the economy is the manufacturing sector, Plosser said.

According to the Philadelphia Federal Reserve‘s Business Outlook Survey of Manufacturers, manufacturing conditions increased to their highest reading since 1984, he said.

“Survey indicators of new orders and shipments are also at high levels. Future activity, measured by how firms think business will be six months from now, also remains high,” Plosser said. “I expect business spending will continue to show strength.”

However, the crisis in Japan poses a threat to the U.S. economy and inflation is going to increase by 2 percent during the next year, Plosser said.

The federal government over-invested in housing initiatives to bolster the economy and house prices will sink as the real estate market recovers and becomes self sustainable, he said. The residential and commercial real estate markets will continue to remain weak, but that will not prevent a broad economic recovery, Plosser said.

Consumer spending, which makes up 70 percent of the nation’s gross domestic product, has grown. Households are paying down debt and some have rebuilt the net worth they saw erased due to falling house and stock values during the recession, he said.

“For consumers to contribute more to the continued expansion of the economy, job growth needs to strengthen,” Plosser said.

A strong monetary policy has to be established in place of the accommodating monetary policy the central bank introduced to help bolster the economy, he said. An accommodating monetary policy is one in which the Fed sets low interest rates so that credit is more easily attained, which makes borrowing easier for business and in turn stimulates investments and expansion of operations.

“Exiting from accommodating monetary policy is very tricky,” Plosser said. “Any exit plan will use several policy tools, including raising interest rates, shrinking the balance sheet, and altering the composition and maturity of the assets we hold. Some would start with raising interest rates; some would begin by shrinking the balance sheet; others would do both.”

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