US near recession, Fed policy-maker warns

Written by Reuters | Chattanooga, March 28: | Updated: Mar 28 2008, 14:15pm hrs
The US economy could be slipping into recession and the Federal Reserve must cushion the pain, a top Fed policy-maker said on Thursday in remarks supporting hopes for more interest rate cuts.

Dennis Lockhart, president of the Atlanta Fed, was one of six US central bankers speaking on Thursday 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 in Chattanooga, Tennessee. "I believe that an important policy objective at this juncture is to ensure that this slowdown is short and shallow."

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. Investors think it will trim rates by another 50 basis points at its next scheduled policy meeting, on April 29-30.

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

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

Pianalto is a voting member of US 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.

Gary Stern, president of the Minneapolis Fed and a voting member this year, also voiced concern over slow growth.

"People should be under no illusions that even if policy is reasonably effective and reasonably timely, that given the disruptions we've had with the financial sector and implications for the outlook ... some of this (weakness) is now baked in the cake," he told a seminar in London.

Stern and Pianalto both voted for the Fed's last rate cut. But two other regional Fed presidents -- Dallas Fed chief Richard Fisher and Philadelphia's Charles Plosser -- voted against such a large move. Plosser speaks Friday in Cape Town, South Africa.


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-functioning markets are essential for promoting financial stability and economic growth."

There was not 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.

Fed Board Governor Frederic Mishkin spoke later on Thursday. He largely avoided commenting on the current economy, but conceded that policy-makers had their work cut out.

"This is as complicated a policy environment as you can get, with supply shocks that are inflationary at the same time that we have shocks that are contractionary from the financial sector," he told an audience in Lexington, Virginia, as he elaborated on why having a specific inflation target was good monetary policy.

US headline consumer inflation rose 4 percent in February versus a year ago due to higher food and energy prices. But the Fed has been forced to put qualms about price pressures on the back-burner while it fights the financial crisis

"You want to stabilize inflation so that you stabilize output as well. And what is important in that context is that you stabilize inflation in the longer run, Mishkin said.

Pianalto, meanwhile, defended the Fed's decision to directly fund JPMorgan Chase's deal to buy ailing investment bank Bear Stearns, saying turbulent times call for extraordinary measures.

Speaking in Seoul, Boston Fed President Eric Rosengren said US unemployment would rise as growth slows and it would not be safe to declare the financial strains over until the housing market has found its footing. He also warned there would be more bank failures ahead.

"Should the economy continue to slow down, as many expect, it is likely that we will continue to see some growth in the problem institutions," he told a Bank of Korea and Bank of International Settlements seminar.