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Monetary Policy and the Slow Recovery: It’s Not Just About Housing

Macroeconomic Principles (3-4 semester credits) Students address classical models of macroeconomic thought in assessing the economy as a whole and the critical factors impacting economic problems. Topics evaluate the works of economists such as John Maynard Keynes and others and investigate how overall levels of employment, production and growth are determined in an economy and of how interactions among nations influence activity worldwide. Topics also explore financial markets, consumption, savings, and investment, the labor market and inflation, theories of long range growth, and business cycles with focus upon the national income, unemployment, inflation, the balance of payments, exchange. | Presentation to the University of San Diego School of Business Administration San Diego CA By John C. Williams President and CEO Federal Reserve Bank of San Francisco For delivery on April 3 2012 Monetary Policy and the Slow Recovery It s Not Just About Housing Thank you. It s a particular pleasure to be with you this morning. The subject of my talk today is the outlook for the economy and Federal Reserve policy. I ll start with a look at the national economy focusing on why the recent recession was so severe and why the recovery has been relatively anemic. I ll then talk about prospects for growth employment and inflation. Finally I ll discuss what the Federal Reserve is doing to bolster the recovery. My remarks represent my own views and not those of others in the Federal Reserve System. Let me begin by saying that I m encouraged by recent signs of a stronger self-sustaining recovery. I m especially glad to see that the economy is adding jobs at a pretty decent clip. Still we have a long way to go. The Fed s mandate from Congress is to promote maximum employment and stable prices.1 Inflation generally has been subdued over the past few years. But more than four years after the recession began the unemployment rate is still 8.3 percent leaving us far short of our employment goal. The Fed has acted vigorously to boost the economy. It s critical that we keep doing so in order to achieve our statutory mandate. I d like to start with a little bit of history. We are in the aftermath of the worst financial crisis and economic downturn since the Great Depression. The downturn came in the wake of an unprecedented run-up in housing prices followed by a traumatic collapse. Although the recession started with this burst housing bubble the economy s problems over the past few years 1 Williams 2012b . 1 have extended well beyond housing. In the broad sense what we ve seen has been a sharp fall in household and business demand for goods and services. That has caused the economy