Published On: Wed, Aug 13th, 2014

Fed Vice Chair Stanley Fischer: Global Recovery Disappointing

Stanley Fischer

Federal Reserve Vice Chairman Stanley Fischer addressed the Swedish Finance Ministry with a concerning assessment about the widespread slowdown in economic recovery. He identified a lackluster growth in labor supply as one factor, which could be due to an aging population or to those dropping out because of economic frustration; the labor participation rate was at a mere 62.9%, the lowest level since 1978.

Fischer thinks this frustration may reflect bleak cyclical factors, but perhaps also to structural issues. The sluggishness is not confined to the U.S. but is also seen in Asia, particularly China. Latin America is also showing signs of weakness. He added that the “road is still unclear” whether reforms by central banks can reverse this trend.

The former Bank of Israel governor, chief economist at the World Bank in 1988-90 and the second-highest official of the IMF from 1994-2001, admits “the global recovery has been disappointing.” The Federal Reserve is expected to raise interest rates next year after keeping them close to zero in the aftermath of the Great Recession. He says quantitative easing has been “largely successful, ” and when rates are raised, the Fed can “maintain them near their targeted level.”

He added, “Raising the rates of interest paid on excess reserves should play a central role in the eventual normalization of short-term interest rates. An overnight reverse repo facility could also play a useful part in setting the floor under money market rates.”

Fischer also called for more careful regulation of risks in hedge funds and shadow banks and more efficient performance of credit-rating agencies.

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