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Interest rates will remain low into 2014 as the recovery of the nation's economy continues to be a work "under construction," an expert from the Chicago Federal Reserve Bank told a group at Lakeland College on Thursday.
David Oppedahl, business economist with the Chicago Fed's economic research department, reviewed the status of several key indicators in providing an overview of the current economy with a group of banking and business leaders attending the Economic Breakfast Briefing, which is co-sponsored by Lakeland and M&I, a part of BMO Financial Group-Sheboygan.
He compared the nation's recovery from this latest recession to the recovery following the recessions of the mid-1970s and early-1980s. He noted that this bounce back has been slower due in part to consumers still recovering from losses in personal wealth due to the massive financial and housing crisis that sparked this latest recession.
Housing starts are beginning to climb, which Oppedahl said will help large Midwest manufacturers like Kohler Co. Banks are also beginning to ease their lending restrictions, although he noted that would-be home buyers have to produce considerably more evidence to secure those loans than lenders expected to see five years ago.
Scott Niederjohn, Lakeland College's Charlotte and Walter Kohler Associate Professor of Economics, said part of the slow recovery is due to cautious American households and firms continuing to pay down their debt along with the effects of the still-sluggish housing market.
"Normally people would move to areas where there are jobs, but that isn't happening as people can't sell their homes - adding to the slow pace of the recovery," Niederjohn said. "In many ways, though, the cause of this recession versus previous recessions didn't cause as much harm in the Midwest. We didn't experience that huge housing buildup or see that big bubble in prices compared to some areas. We took the brunt of those previous recessions because they were manufacturing driven."
Oppedahl said he doesn't see inflation as a risk at this point, although Niederjohn said when the economy does bounce back, the Fed will need to watch indicators so inflation doesn't overtake a recovery.
"They'll need to be concerned at some point because when the economy gets stronger, inflation could come really fast due to all of the new money the Fed has created. Tightening (raising interest rates) won't be popular," Niederjohn said. "The Fed has almost doubled the size of its balance sheet and they're putting a lot of new money into economy. They'll need to be ready to reverse their course fast and tighten things up."
Oppedahl and Niederjohn agreed that decisions made following this fall's presidential election, while hard to predict now, will have an interesting impact on future actions by the Fed.
"With this being an election year, in some ways it's forced the Fed to do more things because we know the politicians won't," Niederjohn said. "Whether it's tax cuts or spending cuts, anything President Obama proposes isn't going to be passed by the Republicans, and anything passed by Republicans isn't going to be signed by President Obama. So that leaves the Fed to make decisions because nothing is happening on the fiscal side of the equation."