Economy May Be Slipping Into Recession: Fed Officials


The U.S. economy seems to be slipping into recession and the Federal Reserve must cushion the pain and make it as brief as possible, two Fed policymakers said.

Fed Update

Dennis Lockhart, president of the Atlanta Fed, was one of a series of central bank speakers on the luncheon speaking circuit hours after government data confirmed anemic growth in
the fourth quarter, which analysts say has since slowed further.

"It's clear the economy is in a slowdown that resembles past periods that were the leading edge of a recession," Lockhart told a Rotary Club meeting. "I believe that an important policy objective at this juncture is to ensure that this slowdown is short and shallow."

Meanwhile, Gary Stern, president of the Federal Reserve of Minneapolis, said economic growth is likely to continue to deteriorate further before it improves because of the lag with which policy works.

Gary Stern

Speaking in London, Stern said the Fed has acted decisively and that monetary policy will be able to stem the weakness in the US economy.

However, 'because policy acts with a lag, some of that deterioration is inevitable,' as the implications of the credit crunch and falling house prices are 'baked in the cake', said Stern.

Stern said he was 'disappointed' by recent inflation figures, which had been higher than he was expecting. He expects inflation to ease back down to its long-run average as domestic demand decreases.

Meanwhile, Cleveland Fed Bank President Sandra Pianalto said a mortgage crisis that is pulling down housing prices was casting a pall over consumer spending and was "very detrimental
to our economy."

Much of her address in Dayton, Ohio, dealt with the Fed's effort to put new policies into place to try to mitigate the damage to a vulnerable economy from the ongoing credit crisis.

Pianalto is a voting member of U.S. central bank's policy-setting Federal Open Market committee this year, but Lockhart is not; the Fed's regional bank presidents get voting
slots on a rotating basis.

The Fed has pumped hundreds of billions of dollars of liquidity into strained markets and allowed investment banks access to its credit facilities -- the first time since the Great Depression that it has permitted non-banks to go to its discount window for cheap loans.

"All of these innovations are designed to bolster market liquidity and promote orderly market functioning," Pianalto said. "Liquid, well-functioniong markets are essential for promoting financial stability and economic growth."

There wasn't much growth in the fourth quarter, the Commerce Department confirmed on Thursday as it reported gross domestic product grew at a scant 0.6 percent annual rate after
expanding at a 4.9 percent clip in the third quarter. Corporate profits shrank as the year ended, and growth is widely seen as having slowed or stopped this year.

The Fed last week slashed benchmark lending rates by a hefty three-quarters of a percentage point to a three-year low of 2.25 percent, in addition to the other measures it has introduced to keep money flowing in markets.

Pianalto defended the U.S. central bank's decision to directly fund JPMorgan Chase's deal to buy out ailing investment bank Bear Sterans, saying that turbulent times call for extraordinary measures.

A third central bank policy-maker, Fed Governor Randall Kroszner, avoided direct comment on the economy during an address to a Washington real estate group, but did pledge the Fed will tighten up the rules on future lending.

Loose practices like failing to verify a mortgage borrower's income or employment are widely blamed for having permitted people who lacked the ability to repay to get subprime mortgages that now are defaulting in droves.

Kroszner said the Fed is proposing changes that would "prohibit a lender from engaging in a patter or practice of making higher-priced loans based on the value of the borrower's
house rather than on the borrower's ability to repay from income."