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The U.S. and global recoveries have been "disappointing" so far and may point to a permanent downshift in economic potential, U.S. Federal Reserve Vice Chair Stanley Fischer said on Monday.
In an overview of the years since the 2007-2009 financial crisis and recession, Fischer said a slowing of U.S. productivity, declining labor force participation and other factors may have scarred the United States' ability to generate economic growth.
The same thing may be happening for different reasons in Europe, major emerging economies like China, and elsewhere, he said, forcing central bankers to recast their understanding of inflation, employment and growth in general.
"The global recovery has been disappointing," Fischer said in prepared remarks for a speech to an economic conference in Sweden. Long-run annual growth in the United States may now be perhaps as low as 2 percent, a full percentage point below the estimate of Fed policymakers as recently as 2009, he said.
Some of that may represent temporary factors that will change if, for example, the U.S. housing market improves.
"But it is also possible that the underperformance reflects a more structural, longer-term shift in the global economy," Fischer said.
Fischer, the influential new No. 2 official at the U.S. central bank, outlined the challenges facing monetary policymakers as they try to navigate the end of the unconventional methods used to support the economy in recent years.
It remains uncertain, he said, whether lower productivity growth and lower labor force participation rates are now permanent features of the U.S. economy—complicating estimates of growth, inflation, and the amount of slack in labor and product markets.
The more than $4 trillion in assets now held on the Fed's balance sheet, he said, will also make it more difficult to manage short-term interest rates. He added that he believes the Fed has developed a suite of tools, such as the interest paid on overnight bank reserves, that will be successful in maintaining a target rate.
Since the crisis, central bankers have also become more concerned with what role they should play in ensuring financial stability, an issue where Fischer has been an outspoken advocate of aggressive central bank involvement.
He said macroprudential and regulatory tools should be a country's first line of defense for financial stability—regardless of whether those measures are employed by the central bank or other agencies. The blunter tool of monetary policy—raising interest rates to slow rapid growth, for example—should be a last resort, he said.
But he acknowledged there were challenges.
If, for example, authority over some regulations rests with other agencies, the central bank may be left trying to lobby for their use. In the United States, the Fed is among the agencies represented on the Financial Stability Oversight Council, for example, but power is distributed among several agencies.