Fed's Fisher Says Recovery Will Be Very Slow

The U.S. recession is fading but the economy will not recover in a "meaningful" way before the end of this year and deflation remains a risk in this climate, a top Federal Reserve official said on Thursday.

CNBC.com

Dallas Federal Reserve Bank President Richard Fisher also said that official foreign holdings of U.S. government bonds had grown and appetite to hold the country's assets remained intact, despite expected record U.S. government deficits.

"There continues to be strong demand for longer duration Treasuries," Fisher told the Washington Association of Money Managers in prepared remarks. A steep sell-off in the U.S. government bond market on Wednesday was blamed in some quarters by a decline in foreign demand for U.S. assets.

Fisher, who is not a voting member of the Fed's policy-setting committee this year, said that inflation would stay "meek" amid a tepid recovery.

However, he also emphasized that the Fed was well aware its aggressive expansion of the central bank's balance sheet through the purchase of assets like Treasuries and mortgage backed securities had long-term inflation implications, and it was focused on getting its exit strategy right.

"Nobody I know on the (Fed's policy) committee wants to maintain our current posture for any longer and to any greater degree than is minimally necessary to restore the efficacy of the credit markets and buttress economic recovery without inflationary consequences," he said.

"Indeed, as I speak, we are studying ways to unwind our balance sheet in a timely way," Fisher added.

This did not sound like an immediate concern for Fisher, who said he expected the economy to find its footing, but thought it would not post a vigorous rebound, or even a more modest 'U' shaped recovery.

"I would be delighted, but surprised, if meaningful sustained growth gets under way before the end of the year," Fisher said, adding that he saw this pushing U.S. unemployment to 10 percent before it started to head back down.

U.S. unemployment was 8.9 percent in April, up from 4.9 percent at the start of the recession in December 2007, and with so much slack in the economy there was little prospect of inflation getting out of hand any time soon.

"Given the vast amount of slack worldwide, the near-term outlook for inflation is meek. Indeed, the recent pressures have been to the deflationary side," he said.

"If you want to know the outlook for inflation over the next quarter or next year, look at current domestic and global slack: It is doubtful that inflation will raise its ugly head until employment and capacity utilization tighten," he said.

Fisher also acknowledged criticism that some of the Fed's robust actions to shelter the U.S. economy had veered onto turf that could be called fiscal policy. This has raised questions of Fed independence, as well as whether U.S. lawmakers might want more say in the running of the central bank.

"There have been suggestions that Congress should be involved in the selection of Federal Reserve Bank presidents," Fisher said, referring to himself and the 11 other heads of the dozen regional Federal Reserve banks.

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The U.S. president appoints the seven members of the Fed's Board of Governors in Washington, subject to the approval of the Senate, but the 12 regional Fed chiefs are selected by their local business communities, and approved by the Board.

"I trust that Congress will resist this initiative and not upset the careful federation that has for so long balanced the interests of Main Street with those of Washington, just as we at the Federal Reserve must resist the urgings of some to accommodate the short-term financing needs of the Treasury," he said.

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