Housing, Fiscal Policy Still Drag on Economy: Fed's Raskin

WASHINGTON — Federal Reserve Board Gov. Sarah Bloom Raskin warned Thursday that the government's tightening fiscal policies and a slow housing recovery will continue to restrain a U.S. economic recovery.

"The U.S. economy has continued to recover from the effects of the financial crisis and deep recession, though at a pace that has been disappointingly slow," said Raskin speaking before the Society of Government Economists and the National Economists Club. "The recovery does appear to have picked up steam in some sectors, most notably in housing, likely reflecting the easing of some of the headwinds that had been holding back the pace of the recovery in earlier years."

She said the government's fiscal policy persists as an "important source of restraint," which has continued to tighten since 2011.

"The legislated reduction in spending by the federal government is exerting a clear and continuing drag on economic activity," said Raskin.

Even before the spending cuts kicked in related to the sequestration, real purchases made by the government had dropped at an annual rate of more than 8% in the first quarter of this year, noted Raskin. "These cuts in federal spending are likely to be an important influence on the near-term prospects for economic growth."

The pace of the economic recovery has slowed because of the lingering effects of the financial crisis including the housing market, the ongoing situation in Europe, fiscal policy and the condition of the financial sector, said Raskin.

She noted there were growing signs of an economic recovery in the housing market given rising home prices. "We see that overall demand has been strengthening, with both home sales and prices rising markedly in many areas," said Raskin.

Following the financial crisis, millions of American homeowners were underwater on their mortgages, homes turned into vacant priorities, and mortgages became very difficult to obtain without an excellent credit history and a substantial down payment.

Rising home prices over the last year have helped to increase families' household net worth and have pushed some homeowners above water on their mortgages, Raskin said.

"These developments may help to ease credit for many households as well, although mortgage credit remains very tight," said Raskin.

Still, she stressed her persistent concern of providing Americans with access to affordable credit, especially when it comes to housing.

"We clearly still have a long way to go in assuring that Americans have access to affordable credit," said Raskin. "An especially large number of people are unable to obtain mortgage credit, and credit card borrowing is also tight."

She also noted that the U.S. banking industry is getting stronger as a result of tougher capital regulatory requirements.

"While much work remains for regulators and banks implementing pending capital requirements, most large, medium-sized, and community banks are in stronger capital positions today than they were prior to the financial crisis," said Raskin.

Raskin said headwinds from the financial sector over the last year have also "diminished somewhat" and "should present less of a restraint on economic growth."

She said U.S. equity prices have risen more than 10% so far this year continuing a trend from last year's 13% increase. Risk spreads embedded in the interest rates paid by U.S. businesses over the past year have also moved lower over to moderate levels.

She said that recent actions by the Obama administration and Congress to reduce the budget deficit would led to further tightening of fiscal policy.

"Both the tax legislation signed into law in January and the sharp spending cuts associated with sequestration will likely significant hinder GDP growth this year," said Raskin.

On Europe, Raskin noted that there have been signs of some improvement on the continent since last summer, aided by policies of the European Central Bank, including the agency's decision to purchase sovereign debt from weak euro-area countries and ongoing talks to create a banking union.

"If policymakers in Europe can follow through on their commitment to financial integration and structural reforms, among other things, financial stress in Europe should continue to lessen and European economies should gradually recover from their current slump," said Raskin.