Me and say facebook is great for gossiping and to see what my friends are in for lunch, but if you were to talk to somebody in the middle east, maybe, you would hear a different story facebook was providing access to news, people that had unique access to information that they were not able to get out otherwise. You get a much more meaty story about what facebook means to them. Facebook engineer chris cox with an insiders view of the company thanksgiving day on cspan. At 2 00 2 00, chief justice john roberts. Later, space pioneers and nash at nasa officials pay amash to the first man to walk on the moon, neil armstrong. Federer reserve chairman ben bernanke is in washington to negotiate a deal to avoid the socalled fiscal clef. Well speaking at the Economic Club of new york, he also called for an increase in the federal debt limit, st. A default could result in an economic crisis. Saying a default could result in an economic crisis. Thank you very much. Good afternoon. It is nice to join me for lunch at this intimate gathering. [laughter] i know many of you and your friends and neighbors are recovering from the defense of Hurricane Sandy i want to let you know our thoughts are with everyone who has suffered during the storm and its aftermath. It has been a very challenging time for new york city. I think you have shown quite a bit of fortitude in coming back and getting back to business. My remarks today are going to focus on the reasons for the disappointingly slow pace of economic recovery in the United States, and the policy actions that have been taken by the federal open Market Committee to support the economy. In addition, i will discuss important economic challenges our country faces as we close out 2012 and move into 2013, in particular the challenge of putting federal government finances on a sustainable path and the longer run while avoiding actions that would endanger the economic recovery in the near term. The economy is continuing to recover from the financial crisis and recession, but the pace of the recovery has been slower than fomc participants and others had hoped or anticipated when i spoke here last, three years ago. Indeed, since the recession trough in 2009, growth in real gdp has averaged only a little more than 2 per year. Similarly, the job market has improved over the past three years, but at a slow pace. The Unemployment Rate, which peaked at 10 in the fall of 2009, has since come down 2 , to just below a . 8 . This is a welcome decline, but it it has taken a long time to achieve the progress, and the unemployment level is still well above its level prior to the onset of the recession and the level that our colleagues and i think can be sustained once a full recovery is achieved. Many features of the job market, including the historic high level of longterm unemployment, the large number of people working parttime because they have not been able to find full time jobs, and the decline in Labor Force Participation reinforce the conclusion that we have some way to go before the labor market can be deemed healthy again. Meanwhile, inflation has generally remained subdued. As is often the case, inflation has been pushed up and down in recent years by fluctuations in the price of crude oil and other globally traded commodities, including the increase in farm prices brought on by the summer drought. With longerterm Inflation Expectations remain stable, the ad and flow of Commodity Prices have led to only transfer movements in inflation. Indeed, since the recovery began about three years ago, Consumer Price inflation as measured by the personal consumption expenditures index has averaged almost exactly 2 , which is the fomc longer run objective. Because ongoing slack in labor should continue to restrain wage and price increases, and the expectations of inflation continuing to remain well anger, inflation over the next few years is likely to remain close to or a little below the committees the objective. As background for our Monetary Policy decision making, we add the reserve have spent a good deal of effort attempting to understand why the recovery has not been stronger. Studies of previous financial crises proved one good place to start. This literature, as many of you know, has found severe financial crises, particularly those associated with housing booms and busts, have often been associated with many years of subsequent weak performance. While this result allows for many interpretations, one possibility is the financial crisis or the deep recessions that typically accompany them may reduce an economys potential growth rate at least for a time. The accumulating evidence does appear consistent with the financial crisis and associated recession having reduced the potential growth rate of our economy somewhat at least during the past few years. In particular, Slower Growth of central output would expand why the Unemployment Rate has declined in the case of the relatively modest output gains we have seen during the recovery. Output normally has to increase at about a longerterm trend just to create enough jobs to absorb new entrants to the labor market. Trend growth is usually needed to reduce unemployment. The fact that unemployment has declined in recent years despite Economic Growth at 2 suggests that the growth rate of potential output must have recently been lowered from the roughly 2. 5 rate that appeared to be in place before the crisis. There are a number of ways in which the financial crisis could have slowed down the greater growth of the economys potential. For example, the extraordinarily severe job losses that fog the crisis, especially in housing related industries, may have exacerbated for a time the mismatch between Jobs Available and the skills and locations of the unemployed. Meanwhile, the very high level of longterm unemployment has probably led to some loss of skills and Labor Force Attachment among those workers. These factors may have pushed up to some degree the socalled natural rate of unemployment. The rate of unemployment that can be sustained under normal conditions. A reduced labor force but is a patient as well. The pace of productivity gains Labor Force Participation as well. The pace of productivity gains also have been restrained by the crisis as Business Investment declined sharply. Increases in risk aversion and uncertainty combined with tight Credit Conditions may have impeded the commercial application of new technologies and slow the pace of business formation. Importantly, however, all the the nations potential output may have grown more slowly than expected in recent years, this slowing the scenes at best a partial explanation of the disappointing pace of the economic recovery. In particular, even though the natural rate of unemployment have increased somewhat, a variety of evidence suggests that any such increase has been modest and a substantial slack remains in the labor market. For example, the slow pace of employment growth has been widespread across industries and regions across the economy. That pattern suggests a broad base shortfall in demand rather than a substantial increase in mismatch between available jobs and workers. Because greater mismatch could imply that the demand for workers would be strong in some regions and industries but not weak across the board. Likewise, a mismatch of jobs and workers if that were the predominant problem, we would expect to see wage pressures developing in Industries Related demand is strong. In fact, wage gains have been subdued in both industries most industries and parts of the country. The consensus among my colleagues at the fomc is that the Unemployment Rate is still well above its lumber run sustainable level, perhaps by 2 or 2. 5 or so. A critical question, then, is why the significance slack in the job market still remains after three years of recovery. A likely explanation, which i will discuss further, is that the economy has been faced with a variety of headwinds that have hindered what otherwise might have been a stronger cyclical rebound. If so, we may take some encouragement from the likelihood that there are potentially two sources of gdp growth in the future. First, the fact of the crisis on potential output should fade as the economy continues to heal. Second, the head winds continued to dissipate, as i expect, growth should pick up further as many who are currently unemployed or out of the labor force find work. One of the headwinds slowing return of our economy what are the headwinds slowing the return of our economy to full employment . Some come from the housing sector. Previous recoveries have been associated with a vigorous rebound in housing as rising incomes and a decline mortgage Interest Rates have led to sharp increases in the demand for homes. But the housing bubble and its aftermath have made this episode quite different. In the first half of the past decade, both housing crisis and construction prices and construction rose to unsustainable levels, leading to a subsequent collapse. House prices declined almost onethird nationally from 2006 until early this year. Construction of singlefamily homes fell by twothirds and the number of disk construction jobs decreased by nearly one third. The associated surge in the legacies on mortgages helped to trigger the financial crisis. Delinquencies on mortgages hops to trigger the financial crisis. Recently, home prices and construction have moved up. These developments are encouraging and it seems likely that residential investment will be a source of Economic Growth and new jobs over the next couple of years. However, welt historical low mortgage Interest Rates and a drop in home prices have made housing exceptionally affordable, a number of factors continue to prevent the sort of powerful housing recovery that is typically has typically occurred in the past. Lenders have maintained tight curbs and conditions on mortgage loans, even for potential borrowers with relatively good credit. Landers said a number of factors, including ongoing uncertainty on the course of the economy, the Housing Market, and the regulatory environment. Unfortunately, while some tightening of the terms of mortgage credit is certainly an appropriate response to the developments of earlier excesses, the pendulum appears to have swung too far, restraining the recovery in the housing sector. Other factors slowing the recovery in housing include the fact that many people remain unable to buy homes despite low mortgage rates. About 20 of existing mortgage borrowers owe more on their mortgages than their homes are worth, making it more difficult for them to refinance or sell their homes. Also, a substantial overhang of a vacant homes, either for sale or in the foreclosure pipeline, continue to hold down prices and reduce the need for construction. While these headwinds have clearly started to abate, the recovery in the housing sector is likely to remain moderate by historical standards. A second set of headwinds stems from the financial conditions facing potential borrowers in credit and capital markets. After the Financial System seized up in late 2008 and early to doesnt 9, col Economic Activity 2009, global Economic Activity contracted and credit markets suffered. Although dramatic actions by governments and Central Banks around the world help these markets to stabilize and begin recovery, tough credit and a high degree of risk aversion remained. Avis they have restrained Economic Growth in the United States and other countries as well. Measures of the condition of u. S. Financial markets and institutions suggest gradual but significant progress achieved since the crisis. For example, credit spreads on Corporate Bonds and syndicated loans have narrowed considerably, and equity prices have recovered most of their losses. In addition, indicators of market stress and illiquidity, such as shortterm funding markets, have generally returned to levels near the scene before the crisis. One gauge of the overall improvement of Financial Markets is the National Financial conditions index, maintained by the fed reserve bank of chicago. This index shows that financial conditions viewed as a whole are now about as accommodative as they were in the spring of 2007. In spite of this brought improvement, the harm inflicted by the financial crisis has yet to be fully repaired important segments of the financial sector. One example is the continued weakness of some categories of bank lending. Banks capital positions and overall asset quality have improved substantially over the past several years, and overtime the Balance Sheet improvements will position banks to extend certainly more credit to back dependent are worse. Indeed, some types of credit, such as commercial and industrial loans, have expanded notably in recent quarters. Nonetheless, banks are being a conservative in extending loans to many consumers and some businesses, likely even beyond the restrictions on the supply of mortgage credit i talked about earlier. This caution in lending by banks reflect their continues desire to guard against risks posed by economic weakness. A common risk at present any major source of financial headwinds are the couple of years is the fiscal and financial situation in europe. The situation was not anticipated when the United States recovery began in 2009. Elevated levels of stress and european and economies and uncertainty about how problems will be resolved are adding to risks that institutions, businesses, and households must consider when making lending and investment decisions. Negative sentiment regarding your appears to have weighed on u. S. Equity prices and prevented u. S. Credit spreads from narrowing even further. Weaker Economic Conditions in europe and other parts of the world have also weighed on u. S. Exports and corporate earnings. Policy makers in europe have taken some important steps recently and in doing so have contributed to some welcome easing and financial in the financial conditions. In particular, the new out right Monetary Transactions Program of the European Central bank under which it can purchase sovereign debt of bhumibol euro area countries to agree to meet prescribed conditions a vulnerable euro area conditions that agree to meet prescribed conditions has have helped. European governments are also strengthening their financial firewalls and moving toward a greater fiscal and banking union. Greater improvement in financial conditions will depend in part on the extent to which european policymakers follow through on these initiatives carri. A third headwind to the recovery and one which may intensify in the coming quarters is u. S. Fiscal policy. Although fiscal policy at the federal level is quite a expansionary during the recession and early in the recovery, as the recovery proceeded the support provided for the economy by federal fiscal actions was increasingly offset by the adverse effects of a tight budget conditions for state and local governments. In response to a large and sustained decline in their tax revenues, state and local governments had cut about 600,000 jobs since the Third Quarter of 2008 while reducing real expenditures for Infrastructure Projects by about 20 . More recently, the situation has to some extent reversed. The drag on Economic Growth for state and local fiscal policy has diminished as revenues have improved and pressures have eased for further spending cuts or tax increases. In contrast, programs have led federal fiscal policy to begin restraining gdp growth. Indeed, almost any under almost any plausible scenario the drag next year from federal fiscal policy on gdp growth will outweigh the positive effect on growth from fiscal expansion at the state and local level. However, the overall effect of the federal fiscal policy on the economy in the near term and the longer run remains quite uncertain and depends on how policy makers meet two daunting fiscal challenges. One by the start of the new year, and the other by no later than the spring. What are these women challenges . First, i do mean the challenges . First, the congress will need to prevent the protect the economy from the full brunt of the current fiscal tightening built into law, the socalled fiscal cliff. The realization of all the automatic tax increases and spending cuts that make up the fiscal cliff absent offsetting changes would pose a substantial threat to recovery. Indeed, by the reckoning of the congressional budget office, and that of many outside observers, a fiscal shock of that size would send the economy toppling back into recession. Second, early in the new year it will be necessary to improve and increase the federal debt limit to approved an increase in the federal dedead debt limit. The threat of default in the summer of 2011 fueled Economic Uncertainty and badly damaged confidence even though an agreement was ultimately reached. A failure to reach a timely agreement this time around could impose even heavier economic and financial costs. As this policy makers face these critical decisions, they should keep two decisions in mind. First, the federal gobudget is on an unsustainable path. The budget deficit, which peaked 2009, is expected to narrow further in the coming years as the economy continues to recover. However, the cbo projects that under a possible such a policy assumptions the deficit could still be greater than 4 of gdp in 2018,