By Steve Matthews and Vivien Lou Chen
March 27 (Bloomberg) -- The presidents of two regional Federal Reserve banks voiced confidence the U.S. economy will show signs of recovery by year-end, responding to unprecedented monetary stimulus and a $787 billion fiscal package.
“Resumption of growth should not be too far off,” Minneapolis Fed President Gary Stern said yesterday in a speech, while Richmond Fed President Jeffrey Lacker cited several “favorable signs” for the economy, including stabilization in retail sales and continued improvements in wages and salaries.
Recent gains in home sales and residential construction also suggest that the rate of decline in gross domestic product may be easing after a 6.3 percent annual pace of contraction in the fourth quarter, the worst performance since 1982.
“Increasingly, the view is the worst quarter is behind us,” said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, and a former Fed economist. Fed policy makers “may be feeling a little better that they are not having to downgrade their forecasts.”
Both Lacker and Stern noted uncertainty over the precise timing of a recovery. The economy has yet to show a decisive reaction to a reduction of the Fed’s benchmark interest rate to as low as zero percent and emergency credit programs that have expanded the central bank’s balance sheet to $2.07 trillion.
“It bears emphasizing that uncertainty about the economy is particularly acute right now,” Lacker said in a speech in Charleston, South Carolina. “While there are indications consistent with the emergence of positive momentum by the end of the year, we are likely to see quite negative economic reports in the meantime.”
Jobless Benefits
The number of people collecting U.S. jobless benefits rose to a record 5.56 million as of March 14, indicating more Americans are spending longer periods out of work, the Labor Department said yesterday. Initial claims topped 600,000 for an eighth straight time.
“The economy is in the midst of a serious recession that seems likely to persist at least though mid-year,” Stern said in a speech to the Economic Club of Minnesota in Minneapolis. “Once under way, the pace of expansion is likely to be subdued for some time.”
An increase in consumer spending may indicate that the economy is likely to stabilize by the end of the year, Lacker said.
“Prominent forecasters expect the economy to bottom out at some point later this year and then gradually regain forward momentum, and I think that is a reasonable expectation,” he said. Increased retail spending through February “may be a sign that consumers are responding” to “less adverse longer- run income prospects.”
Stocks Rallied
U.S. stocks rallied yesterday, extending the market’s best monthly gain since 1974. The Standard & Poor’s 500 Index added 2.3 percent to 832.86, up 13 percent in March.
Treasury 10-year notes rose yesterday for the first time in six days as the Fed prepared to buy U.S. debt today for the second time this week and concern declined that record U.S. debt sales would overwhelm demand.
The Federal Open Market Committee on March 18 authorized the purchase of $300 billion of long-term Treasuries and announced a plan to more than double purchases of mortgage debt to $1.45 trillion in an attempt to reduce home-loan rates.
“The Fed has flooded the system with liquidity like we’ve never seen, so the comparisons with the Great Depression flop in my view,” Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut, said in an interview with Bloomberg Radio. “By the fourth quarter, maybe even the third quarter, we’ll be pleasantly surprised by the economic data,” he said.
Credit Contraction
Fed Chairman Ben S. Bernanke is trying to prevent the credit contraction from deepening what may be the worst recession in 70 years.
Policy makers “have responded aggressively and, in some instances, with unprecedented action,” Stern said.
While it’s unclear whether “further steps will be required to restore stability,” Stern said he’s “guardedly optimistic that many pieces are now in place to contribute to improvement in financial market conditions and in business activity.”
To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.netVivien Lou Chen in San Francisco at vchen1@bloomberg.net
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