NEW YORK (Reuters) – The US recession will likely end this year and policymakers must be ready to act quickly to ensure inflation does not take hold when the economy recovers, two top Federal Reserve officials said yesterday.
Richmond Federal Reserve President Jeffrey Lacker and Kansas City Federal Reserve President Thomas Hoenig offered slightly different views on when the world’s biggest economy will begin to grow again.
Lacker, speaking to business leaders in Charlottesville, Virginia, said that given the resilience of US consumers —whose spending drives the US economy — and the unprecedented stimulus injected into the US economy by the Fed, he expects growth to resume by year end.
Hoenig, speaking in New York, was less confident saying the economic outlook remained “uncertain” and it would take “most of the rest of the year” to move out of recession before starting on a path of “steady, slow” recovery in 2010.
Housing and construction data released yesterday added to other recent signs that the worst of the longest recession since the Great Depression may be over, driving the S&P 500 stock index into positive territory for the year.
Last week, the Federal Reserve monetary policy committee said the outlook for the US economy has improved a bit in recent weeks but that low interest rates would be needed for some time to ensure it recovers from its deep recession.
Hoenig, who is not a voting member on the central bank’s policy-setting committee this year, said yesterday that the US still has “a ways to go before markets will function effectively without government assistance.”
The Federal Reserve’s balance sheet has more than doubled to more than $2 trillion as it set up an array of emergency lending programmes to support key credit markets.
Nevertheless, both officials said the Fed needs to be aware of the risk of inflation once the economy recovers. Last week the core personal consumption expenditures index, which many say is the Fed’s favorite inflation gauge, came in at 1.8 percent — holding well in positive territory.
Lacker, who is a voting member of the Fed’s policy-setting committee in 2009 said the Fed should not wait too long to tighten policy.
“The challenge for us on the Federal Open Market Committee will be to shrink our balance sheet and tighten policy soon enough when the recovery emerges to prevent rising inflation,” he said.
