Treasury Official Predicts Second-Quarter Rebound

The U.S. economy could start to see a recovery as soon as April, despite current conditions indicating a greater risk for contraction, a senior U.S. Treasury official told CNBC Europe Tuesday.

"We know that growth is slowing, the risks are to the downside," Deputy Treasury Secretary Robert Kimmitt told "Squawk Box Europe." "That is precisely why on an unprecedented basis a bipartisan stimulus package was put together last month."

Of the $150 billion package, two thirds will go to consumer spending and one third toward business investment, Kimmitt said.

"Many economists predict -- and we agree -- that the economy will turn up in the second quarter and I think that the stimulus package will have the effect of adding both to growth and to jobs," Kimmitt said.

Dep. Secretary of US Treasury on Turmoil

"There was not doubt that we had a near-term fiscal responsibility to help stimulate the economy and thank goodness we put that $50 billion on business investment because that will generate over 500,000 jobs this year," he added.

As the euro hit a new record high above $1.54 against the dollar, Kimmitt said the Treasury believes that currency rates should be set in openly competitive markets based on underlying fundamentals and that the long-term fundamentals of the U.S. economy are sound.

"I think what we are focused on in the world economy, certainly in the G7, is the fact that the world economy works best on the basis of free trade, flexible exchange rates and the freeflow of capital across borders based on open investment policy," Kimmitt told "Squawk Box Europe".

"At the same time we know that there are structural problems in the world economy, we have to increase our savings rates, we have to get both our budget deficit and our current account deficit down, we need to see demand-led growth in Europe and in Japan and we need to see a continued adjustment of the Chinese currency."


The Treasury sees some signs of an improvement in the labor market, but the 'booster shot' cash injection was imperative, Kimmitt said, adding that there were still challenges ahead.

"We face real headwinds. We face headwinds from the housing market in the United States, from the turbulence in the credit markets and certainly headwinds from commodity prices, not just oil but food, natural resources more broadly."

The Treasury Department is also taking steps to help the housing market by lowering mortgage rates, he added.

Fiscal vs. Monetary Policy

"One of the proposals that we have in the Congress, for example, is to allow states' municipalities to issue tax-free bonds," he said. "Not for infrastructure purposes but to allow creative refinancing at that level."

"We have been wanting to modernize our government-sponsored enterprises, Fannie Mae and  Freddie Mac ," Kimmitt added.

"Their ability to support conforming loans was raised in the stimulus package for just three years and we are prepared to see that done on a longer-term basis, provided it is coupled with an effective regulator for these enterprises as they get larger."