charles i plosser : the us economic outlook and the normalization of monetary policy speech by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, at the society of business economists annual conference, london, england, 9 june 2011. * * * the views expressed today are my own and not necessarily those of the federal reserve system or the fomc. introduction good morning. thank you for this opportunity to speak before your society. as business economists, you are well aware of the extraordinary economic times in which we live. a financial crisis and arguably the worst global recession of the post - war era have challenged policymakers in the u. s. and abroad. in many nations, monetary and fiscal authorities undertook extraordinary actions to mitigate the damage, and for most of the hardest hit countries, the recession trough has passed and a moderate recovery is underway. yet the actions taken leave a legacy of huge government budget deficits, short - term interest rates at record lows, and central bank balance sheets of unprecedented magnitudes. even as our economies recover, policymakers face some daunting challenges as we try to unwind these extraordinary actions and rebuild confidence and credibility in our monetary policy frameworks. today i would like to discuss my outlook for the u. s. economy and some thoughts about ways to begin the normalization of u. s. monetary policy. i believe there are several steps the federal reserve can take to ensure a successful exit from this period of extraordinary accommodation, including taking a page out of the bank of england ’ s book by announcing an explicit numerical goal for inflation. as always, my remarks reflect my own views and do not necessarily represent the views of the federal reserve board or my colleagues on the federal open market committee. economic outlook let me begin with an update on the u. s. economy. we are nearly two years into a moderate, sustained recovery from financial crisis and the worst economic downturn since the great depression. in the fourth quarter of last year, the level of real gdp finally passed its prerecession peak, but it did so with some 7½ million fewer workers, a reflection of strong productivity growth. this year ’ s first - quarter gdp growth, at just below 2 percent, was somewhat disappointing. but i believe that this weakness will likely prove to be a temporary soft patch and that the underlying fundamentals remain in place for the economy to resume growing at a moderate pace in the second half of this

year, and to strengthen a bit more next year. such soft patches are not that uncommon. indeed, last year we experienced just such a bump in the road. yet, after what i described as the summer doldrums, the economy picked up momentum to give us just under 3 percent growth for the full year. i think the slower growth in the early part of this year has similarly been influenced by a number of temporary factors. in particular, severe weather, uncertainty surrounding the aftermath of the disaster in japan, political events in the middle east and north africa, and higher food and energy prices, all have weighed on growth. oil and commodity price increases and supply chain disruptions from the devastation in japan may have some carryover into the second quarter, but i believe any loss of momentum is likely to be transitory. bis central bankers ’ speeches of course, the drama being played out in congress over debt and spending has provided yet another source of uncertainty for the economy. progress in that arena would undoubtedly improve confidence going forward and reduce uncertainty. monetary policy cannot and should not be viewed as a substitute for sound fiscal policies. as i have argued many times in the past, monetary policy is not the silver bullet that many would like to think it is. it cannot solve all of our economic ills, and attempting to do so can be quite dangerous for economic stability. 1 i anticipate moderate but above - trend growth of around 3 to 3½ percent for the remainder of this year and next. the overall strength in some sectors will more than offset persistent weaknesses in others, so that the recovery will be sustained and more broad - based as it continues. improvement in household balance sheets and better labor market conditions will support moderate growth in consumer spending. solid growth in corporate earnings will support continued healthy advances in business spending on equipment and software. housing, however, will likely remain a weak spot in the u. s. economy, with flat to slightly falling prices and little new construction. outside of recent supply disruptions in the auto industry, i anticipate that growth in manufacturing will remain a source for optimism. the philadelphia fed ’ s business outlook survey of manufacturers has proven over the years to be a useful barometer of national trends in manufacturing. in april and may, the measures of current activity saw some pullback from the very high numbers of february and march, but the numbers show that activity in the manufacturing sector continues to expand. moreover, the survey ’ s indicators of future activity,