ben s bernanke : the economic recovery and economic policy speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the new york economic club, new york, new york, 20 november 2012. * * * good afternoon. i am pleased to join the new york economic club for lunch today. i know that many of you and your friends and neighbors are still recovering from the effects of hurricane sandy, and i want to let you know that our thoughts are with everyone who has suffered during the storm and its aftermath. my remarks today will 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 ( fomc ) to support the economy. in addition, i will discuss some 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 in the longer run while avoiding actions that would endanger the economic recovery in the near term. the recovery from the financial crisis and recession the economy has continued to recover from the financial crisis and recession, but the pace of recovery has been slower than fomc participants and many others had hoped or anticipated when i spoke here about three years ago. indeed, since the recession trough in mid - 2009, growth in real gross domestic product ( gdp ) has averaged only a little more than 2 percent 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 percent in the fall of 2009, has since come down 2 percentage points to just below 8 percent. this decline is obviously welcome, but it has taken a long time to achieve that progress, and the unemployment rate is still well above both its level prior to the onset of the recession and the level that my colleagues and i think can be sustained once a full recovery has been achieved. moreover, many other features of the jobs market, including the historically high level of long - term unemployment, the large number of people working part time 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

easing of financial conditions. in particular, the european central bank ’ s new outright monetary transactions program, under which it could purchase the sovereign debt of vulnerable euro - area countries who agree to meet prescribed conditions, has helped ease market concerns about those countries. european governments have also taken steps to strengthen their financial firewalls and to move toward greater fiscal and banking union. further improvement in global financial conditions will depend in part on the extent to which european policymakers follow through on these initiatives. a third headwind to the recovery – and one that may intensify in force in coming quarters – is u. s. fiscal policy. although fiscal policy at the federal level was quite 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 tight budget conditions for state and local governments. in response to a large and sustained decline in their tax revenues, state and local governments have cut about 600, 000 jobs on net since the third quarter of 2008 while reducing real expenditures for infrastructure projects by 20 percent. more recently, the situation has to some extent reversed : the drag on economic growth from state and local fiscal policy has diminished as revenues have improved, easing the pressures for further spending cuts or tax increases. in contrast, the phasing - out of earlier stimulus programs and policy actions to reduce the federal budget deficit have led federal fiscal policy to begin restraining gdp growth. indeed, under almost any plausible scenario, next year the drag from federal fiscal policy on gdp growth will outweigh the positive effects on growth from fiscal expansion at the state and local level. however, the overall effect of federal fiscal policy on the economy, both in the near term and in the longer run, remains quite uncertain and depends on how policymakers meet two daunting fiscal challenges – one by the start of the new year and the other no later than the spring. upcoming fiscal challenges what are these looming challenges? first, the congress and the administration will need to protect the economy from the full brunt of the severe fiscal tightening at the beginning of next year that is built into current law – the so - called fiscal cliff. the realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery – indeed, by the reckoning of the congressional budget office ( cbo ) and that of many outside observers, a fiscal shock