Regional Fed banks voice optimism on economic revival

BLOOMBERG

Sat, Mar 28, 2009 - Page 10

The presidents of two regional Federal Reserve (Fed) banks voiced confidence the US economy would show signs of recovery by year’s end, responding to an unprecedented monetary stimulus and a US$787 billion fiscal package.

“Resumption of growth should not be too far off,” Minneapolis Fed President Gary Stern said yesterday in a speech, while Richmond Fed President Jeffrey Lacker cited several “favorable signs” for the economy, including stabilization in retail sales and continued improvements in wages and salaries.

Recent gains in home sales and residential construction also suggest that the rate of decline in GDP may be easing after a 6.3 percent annual pace of contraction in the fourth quarter, the worst performance since 1982.

Both Lacker and Stern noted uncertainty over the precise timing of a recovery. The economy has yet to show a decisive reaction to a reduction of the Fed’s benchmark interest rate to as low as 0 percent and emergency credit programs that have expanded the central bank’s balance sheet to US$2.07 trillion.

“It bears emphasizing that uncertainty about the economy is particularly acute right now,” Lacker said in a speech in Charleston, South Carolina. “While there are indications consistent with the emergence of positive momentum by the end of the year, we are likely to see quite negative economic reports in the meantime.”

The number of people collecting US unemployment benefits rose to a record 5.56 million as of March 14, indicating more Americans were spending longer periods out of work, the US Labor Department said yesterday. Initial claims topped 600,000 for an eighth straight time.

“The economy is in the midst of a serious recession that seems likely to persist at least though mid-year,” Stern said in a speech to the Economic Club of Minnesota in Minneapolis. “Once under way, the pace of expansion is likely to be subdued for some time.”

An increase in consumer spending may indicate that the economy is likely to stabilize by the end of the year, Lacker said.

“Prominent forecasters expect the economy to bottom out at some point later this year and then gradually regain forward momentum and I think that is a reasonable expectation,” he said.

Increased retail spending through last month “may be a sign that consumers are responding” to “less adverse longer-run income prospects,” Lacker said.

The Federal Open Market Committee on March 18 authorized the purchase of US$300 billion of long-term Treasuries and announced a plan to more than double purchases of mortgage debt to US$1.45 trillion in an attempt to reduce home-loan rates. Chairman Ben Bernanke is trying to prevent the credit contraction from deepening what may be the worst recession in 70 years.

Policymakers “have responded aggressively and, in some instances, with unprecedented action,” Stern said.

While it’s unclear whether “further steps will be required to restore stability,” Stern said he was “guardedly optimistic that many pieces are now in place to contribute to improvement in financial market conditions and in business activity.”