Thursday, June 7, 2012

Comments by FED Chairman

The FED Chairman spoke today regarding the economy. First the drags on the economy we all know:

However, some of the factors that have restrained the recovery persist. Notably, households and businesses still appear quite cautious about the economy. For example, according to surveys, households continue to rate their income prospects as relatively poor and do not expect economic conditions to improve significantly. Similarly, concerns about developments in Europe, U.S. fiscal policy, and the strength and sustainability of the recovery have left some firms hesitant to expand capacity. 

The depressed housing market has also been an important drag on the recovery. Despite historically low mortgage rates and high levels of affordability, many prospective homebuyers cannot obtain mortgages, as lending standards have tightened and the creditworthiness of many potential borrowers has been impaired. At the same time, a large stock of vacant houses continues to limit incentives for the construction of new homes, and a substantial backlog of foreclosures will likely add further to the supply of vacant homes. However, a few encouraging signs in housing have appeared recently, including some pickup in sales and construction, improvements in homebuilder sentiment, and the apparent stabilization of home prices in some areas. 

 And he continued:

Even as fiscal policymakers address the urgent issue of fiscal sustainability, a second objective should be to avoid unnecessarily impeding the current economic recovery. Indeed, a severe tightening of fiscal policy at the beginning of next year that is built into current law--the so-called fiscal cliff--would, if allowed to occur, pose a significant threat to the recovery. 

Moreover, uncertainty about the resolution of these fiscal issues could itself undermine business and household confidence. 

Fortunately, avoiding the fiscal cliff and achieving long-term fiscal sustainability are fully compatible and mutually reinforcing objectives. Preventing a sudden and severe contraction in fiscal policy will support the transition back to full employment, which should aid long-term fiscal sustainability. At the same time, a credible fiscal plan to put the federal budget on a longer-run sustainable path could help keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today. 

A third objective for fiscal policy is to promote a stronger economy in the medium and long term through the careful design of tax policies and spending programs. 

To the fullest extent possible, federal tax and spending policies should increase incentives to work and save, encourage investments in workforce skills, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. 

Although we cannot expect our economy to grow its way out of federal budget imbalances without significant adjustment in fiscal policies, a more productive economy will ease the tradeoffs faced by fiscal policymakers. 

 These are well known generalizations. Simply stated we are still in the tank and Congress and the current President must do something but not too much. The incentive comment is a truism. The alternative? Dis-incent this sector? There were no specifics here, no sharp end of the world warnings, and no look to what happens a la Europe.

There must be an adult somewhere who can lay down the warning that will activate the public response.