Federal Reserve Vice Chairman Stanley Fischer said sluggish labor supply growth is a “source of concern” because it may contribute to a slowdown in longer-run output of the economy, which also faces a drag from housing and “broad based” slowing across emerging markets.
Falling labor-force participation largely reflects an aging population, though there’s “considerable uncertainty” about how much is due to the sluggish economy, Fischer said today in remarks prepared for delivery in Stockholm. The participation rate, which measures the share of working-age people in the labor force, is 62.9 percent, near the lowest since 1978.
“There are good reasons to believe that some of the surprising weakness in labor-force participation reflects still poor cyclical conditions,” Fischer said. “Many of those who dropped out of the labor force may be discouraged workers. Further strengthening of the economy will likely pull some of these workers back into the labor market, although skills and networks may have depreciated some over the past years.”
In his second speech since joining the Fed in May, the former Bank of Israel governor said many advanced economies still struggle after the U.S. recession “left the road ahead unclear.” Central bankers are grappling with how to gauge slack in the economy and whether sluggishness is due to temporary factors they can influence or permanent ones that are beyond the reach of their monetary policy tools.‘Secular Slowdown’
“How much of this weakness on the supply side will turn out to be structural -- perhaps contributing to a secular slowdown -- and how much is temporary but longer-than-usual-lasting remains a crucial and open question,” Fischer, 70, said at a Swedish Finance Ministry conference.
For the U.S., weakness in housing markets, a drag from government budget cuts and weaker European growth are “all prominent factors that have constrained the pace of economic activity.” He said housing “continues to weigh on the recovery” as construction falters and home sales cool, in part because of a “sharp rise” in mortgage rates last year.
Recoveries in advanced economies have been “well below average” while the pace of growth in developing nations “has been disappointing,” said Fischer, who was chief economist at the World Bank from 1988 to 1990 and also served as the No. 2 official at the International Monetary Fund from 1994 to 2001.
“The global recovery has been disappointing,” he said. Slower growth in developing economies “is broad based -- with performance in emerging Asia, importantly China, stepping down sharply from the post-crisis surge, to rates significantly below the average pace in the decade before the crisis. A similar stepdown has been seen recently for other regions including Latin America.”Tougher Regulation
Fischer also spoke on financial regulation, and the tools the central bank may use when it begins to raise the main rate. Fed officials are weighing the timing of their first interest-rate increase in eight years, which the majority of policy makers project will be appropriate sometime next year.
The policy-setting Federal Open Market Committee, which has held the main rate near zero since December 2008, said at its July 30 meeting it still sees “significant underutilization of labor resources.” The FOMC also repeated it’s likely to cut the size of a bond-buying program in “further measured steps” and to keep rates low for a “considerable time” after purchases end.
Policy makers continued to trim purchases that pumped up the Fed’s balance sheet to $4.41 trillion, tapering monthly bond buying to $25 billion in a sixth consecutive $10-billion cut and staying on pace to end the purchase program in October.‘Successful’ QE
Fischer said today the so-called quantitative easing program has been “largely successful.” Unemployment (USURTOT) last month was 6.2 percent after falling to a five-year low of 6.1 percent in June.
Fischer said when the time comes to raise rates the Fed has the tools to “maintain them near their targeted level” even with the large balance sheet. Policy makers are moving closer to deciding on the main tool they will use to tighten policy when the time comes, according to minutes of the June meeting.
“Raising the rate of interest paid on excess reserves should play a central role in the eventual normalization of short-term interest rates,” Fischer said. “An overnight reverse repo facility could also play a useful part in setting a floor under money market rates.’
Most FOMC participants agreed the interest rate on excess reserves that banks deposit at the Fed ‘‘should play a central role.’’ Another tool, the overnight reverse repurchase facility, ‘‘could play a useful supporting role,’’ minutes show.
On regulation and supervision, Fischer said progress has been slow on some aspects of international coordination, including how to wind down some of the world’s largest banks should they fail. He also called for coordination among different financial regulators that will be effective in the event of a crisis.
Fischer said regulators must better monitor risks in hedge funds, insurance companies and other so-called shadow banks, and to improve the performance of credit-rating companies.
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