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Fed's Stern: Recession To Last At Least Two More QuartersLast update

By Michael S. Derby
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The U.S. economy is likely to contract into the summer, before mounting a modest recovery, Federal Reserve Bank of Minneapolis President Gary Stern said Wednesday. The economy is mired in a "a serious recession that seems likely to persist for at least another two quarters," Stern said. "Most sectors of the economy are contracting, and it is difficult, as it always is, to identify with confidence the engine, or engines, of expansion that will propel the recovery in activity," he said. But given the amount of support the economy is getting from both the Federal Reserve and from government stimulus efforts, Stern said "there is reason to think that improvement is not too far off," even though once the recovery has started "the pace of the expansion is likely to be subdued for a time." Stern's comments came from the text of a speech prepared for delivery before Corridor Economic Forecast Annual Meeting, in Cedar Rapids, Iowa. The veteran policy maker will not be a voting member of this year's interest rate setting Federal Open Market Committee. The Fed has been seeking to restart growth by way of extremely aggressive monetary policy - its official interest rate target band is between zero percent at 0.25% - and unprecedented provisions of liquidity, coupled with targeted market interventions. Stern was optimistic the Fed's work, along with already existing and proposed help from the government, will do the trick. "Macroeconomic policies - both those in place and those under consideration - are directed forcefully to reestablishing conditions for sustainable economic growth," Stern said. "It may take time, but I expect these policies, together with the underlying flexibility and resilience of the economy, to succeed," he said. Stern offered a mixed assessment about the state of financial markets. Even with some improvements over the last couple of months, "credit strains are real and pervasive, and that these conditions are likely to weigh on economic activity for some time." The economic outlook held by Stern is shared by many of his fellow policy makers, who have also held out similar outlooks for the economy. On the inflation front, Stern said "concerns have subsided with the dramatic fall in the price of energy." On the flip side, those who are worried about a broad-based pullback in prices probably shouldn't be: "if economic growth resumes in the United States as I expect, the threat of deflation should diminish commensurately," Stern said. The central banker used part of his speech to downplay fears that the rapid expansion of the Fed's balance sheet, from just over $800 billion at the start of the crisis, to its current level of $2.2 trillion, is a force that could eventually fuel inflation. "There is ample time to withdraw excess liquidity as appropriate, and in this regard the Federal Reserve remains firmly committed to long-run price stability," Stern said. The official also used his speech to tackle the outlook for regulatory reform, and explained what he thinks should be done. He reiterated that he believes some of the problems can be addressed via reforms that identify early and work to quickly correct problems at financial institutions. -By Michael S. Derby; Dow Jones Newswires, 201-938-4192 [e-mail] (END) Dow Jones Newswires