By Kristina
Cooke
NEW YORK (Reuters) - The U.S. 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 on Monday.
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 U.S. consumers --whose
spending drives the U.S. economy -- and
the unprecedented stimulus injected into
the U.S. 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
on Monday 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
U.S. 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 on Monday that
the U.S. 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
programs 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.
Other policymakers have warned that
removing stimulus too quickly could plunge
the U.S. economy back into recession.
A surge in inflation as well as
undermining long-term U.S. economic growth
could also make it more difficult for the
U.S. government to attract buyers for the
debt it needs to issue to fund its huge
budget deficit.
Hoenig also noted the potential for
political pressure to keep interest rates
low once the economy begins to recover,
threatening the central bank's
independence and its ability to shift
policy.
He added that the Fed's actions in this
crisis have "almost certainly"
set expectations among markets for similar
aggressive actions in the future -- which
may make investors more likely to take
excessive risks. Continued...
