Fed's Lacker Says Economy May Regain Momentum in '09

By Scott Lanman and Craig Torres

Nov. 21 (Bloomberg) -- Federal Reserve Bank of Richmond President Jeffrey Lacker said the economy could begin a recovery in 2009 as low interest rates, falling energy prices and a diminished drag from housing shore up spending.

``Many analysts expect the U.S. economy to regain positive momentum sometime in 2009,'' Lacker said today in a speech in Bethesda, Maryland. ``That strikes me as a reasonable expectation.''

A credit crunch sparked by the collapse of U.S. mortgage finance has triggered a recession that is showing signs of deepening, with U.S. job losses totaling 1.2 million this year. First-time claims for U.S. unemployment insurance unexpectedly rose last week to the highest level since 1992, Labor Department figures showed yesterday.

``Once households are convinced that an end to the deterioration in labor market conditions and the fall in equity and home prices is in view, however, consumer spending growth will be based on improving longer-run income prospects and is likely to pick up substantially,'' Lacker said in remarks to the Tech Council of Maryland.

The Fed has reduced its benchmark interest rate by 4.25 percentage points since September 2007, to 1 percent, and economists forecast further rate cuts. JPMorgan Chase & Co. predicted this week that the Fed will probably lower interest rates to zero percent over the next two months to staunch deflation.

Policy Now `Stimulative'

Lacker didn't give his support to such a move today, saying that ``monetary policy is now quite stimulative.''

``While the downturn in real economic activity is going to pose challenges for monetary policy in the period ahead, it's essential that we not let inflation drift from view,'' Lacker said.

At the same time, Lacker said it is ``reasonable'' to expect overall inflation to drop as oil prices fall. A decline in core inflation, or price indices minus food and energy, could be influenced by expectations of how the central bank will guide monetary policy, he said. Lacker said he would also be cautious about relying on the view that economic slack will reduce core inflation.

Inflation Outlook

``Inflation may not moderate obediently during the downturn, and may firm with the ensuing recovery,'' Lacker said. ``It is crucial that we not allow expectations of future inflation to creep higher during this recession.''

The credit crisis has resulted in $967 billion in writedowns and losses for financial companies worldwide since the start of 2007. In response, Congress approved a $700 billion financial bailout program that is injecting capital into banks. The Fed has rescued Bear Stearns Cos. and American International Group Inc. from failure with emergency loans.

Fed Chairman Ben S. Bernanke has also created six borrowing programs providing more than $1 trillion in loans to aid banks, bond dealers and U.S. companies that issue commercial paper.

Lacker reiterated his remarks from two days ago that the scope of the government's financial safety net ``ultimately must be rolled back.'' Any new regulations should set ``boundaries around central bank lending and public sector support and accordingly reconstruct the relationship between the public sector and financial markets,'' he said.

Deflation Threat

The U.S. consumer price index plunged 1 percent last month, the most since records began in 1947, according to a report this week, signaling that deflation may worsen the downturn. The U.K.'s inflation rate fell the most in at least 11 years in October.

Europe and Japan slipped into a recession last quarter, and China's economy, the biggest contributor to global growth in 2007, is slowing. The German economy, Europe's largest, is in the worst recession in at least 12 years.

U.S. foreclosure filings in October jumped 25 percent from a year earlier, compared with average monthly gains of about 50 percent so far in 2008, according to RealtyTrac, a seller of foreclosure data. Filings increased 5 percent from September after California passed a law delaying foreclosures for some borrowers.

``I would be surprised if we don't see a bottom in housing construction around the middle of 2009,'' Lacker said today. ``This is the third straight year, however, that I've been expecting a bottom in the housing market in the middle of next year, so my outlook is tempered by more than the usual amount of humility.''

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.