The U.S. economy needs to grow quickly for an extended period of time to make inroads into the unemployment rate, Federal Reserve Bank of Chicago President Michael Moskow said Monday.
“We have got to grow above potential for a significant period of time ... so we can continue on that long-term sustainable trend and reduce the unemployment rate,” Moskow said in a television interview with CNBC.
He said trend growth was around 3.25 percent, and noted the economy has been growing below that pace for three years now.
The Federal Reserve has kept the federal funds rate at a 45-year low of 1 percent since June, and the central bank has said rates can stay low for a “considerable period”.
Moskow declined to define what that time frame meant, saying it depends on the conditions of the economy. But he pointed out there is still plenty of excess capacity in labor markets and at factories.
He suggested that with inflation so low, the Fed can keep rates down longer than it has in past recoveries.
“It’s important to keep in mind we’re in a very low inflation environment at this point and so the Fed can be more accommodative now,” without retreating from its vigilance on inflation, Moskow said.
Most economists expect official rates to be held steady through at least the middle of 2004, before an eventual rate rise, and most see only a slight improvement in the unemployment rate over that time.
But Moskow, a voting member of the Fed’s policy committee, did note some early signs of improvement in the labor market.
He said temporary hiring was up significantly and the unemployment insurance claims were looking a bit better. In addition, anecdotes from businesses were more optimistic.
“The tone of anecdotes that we’re hearing from people in the business community in all sectors is definitely improved,” he said. “But by no means are we out of the woods.”
The Chicago Fed has been studying the latest downturn in the manufacturing sector, which has lost almost 3 million jobs in the past three years.
Moskow said although some of the job losses in manufacturing have been permanent, he expects there will eventually be a pick-up in net manufacturing jobs.
Earlier this month, Moskow conceded there were worries that a lack of job growth might undermine confidence and lead households and businesses to scale back spending.
“While such scenarios are of concern, they seem less likely than one in which demand continues to grow at a solid pace and employment eventually rebounds,” Moskow said on Oct 2.