While history’s sometimes a good lesson when it comes to economic policy, the most recent recession and what’s followed since has been anything but normal, said Eric Rosengren, the president of the Federal Reserve Bank of Boston, in a prepared speech at a Fed economic conference on Friday.
The long, sustained recovery has been extremely slow by historical standards, which can be attributed to several things, he said. The recent comeback from the recession has been marked by anomalies, some of which may explain why the recovery isn’t moving as fast as those in the past.
While gross domestic product has risen only gradually since the end of the recession, unemployment has fallen faster than in prior recoveries, Rosengren said. While the rapid decline in the unemployment rate was “certainly welcome,” it’s one of the recovery’s puzzles, he said.
Another reason for the slow recovery has been an increased pattern of savings by consumers. In previous recoveries, savings rates declined. This time, however, the savings rate has actually grown, albeit slowly. As consumers save more, they spend less, which may be part of why the recovery is moving along so slowly.
“At least to date, the decline in the saving rate prior to the Great Recession has been followed by a higher saving rate, which may suggest different savings behavior stemming from the experience of the Great Recession,” Rosengren said. “Should this pattern persist, it has implications going forward for consumption patterns and the economy more broadly.”
Inflation also has remained subdued, and while that’s not unprecedented — it was below 2% after the 2001 recession — it rebounded in the past but has yet to do so this time around, he said. Even with the labor market near what some economists are calling full employment, the core inflation rate has stayed below 2% and is currently only at 1.7%.
One other anomaly noted by Rosengren is that the federal fund rate has remained well below levels seen during prior recoveries. While the need for increased monetary accommodation is necessary due to the severity of the recession, the federal funds rate, which has been the source of much consternation between economists and traders as of late, has remained low.
The real federal funds rate had almost reached 2% in the fourth year following the 2001 recession or had exceeded 2% following the 1991 recession, he said. The federal funds rate hasn’t rebounded in the current recovery. The Federal Open Markets Committee in December raised rates by 25 basis points in December and, at the time, said it planned to increase rates four times in 2016. Global economic headwinds since the start of the year, however, have kept the Fed on the sidelines and rates at 0.25% to 0.5%.
All of this, Rosengren said, shows that while historical data is often usable when setting economic policy, the current recovery has strayed from normal paths.
“While one must always be cautious about assuming that current trends reflect something different from historical experience, it is important to consider whether this time has indeed been different,” he said. “If it has, then the lessons from this recovery — perhaps an understanding of a `new normal’ environment — may very well impact how we should be thinking about monetary policy going forward.”
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