Fed’s Stern Says Recovery May ‘Not Be Too Far Off’

By Vivien Lou Chen

April 9 (Bloomberg) -- Federal Reserve Bank of Minneapolis President Gary Stern said that while “appreciable strains” remain in credit markets, the resumption of U.S. economic growth “should not be too far off.”

“While it is still far too early to fully tally results, there has been progress and I anticipate more to come,” Stern, 64, said in a speech today in Sioux Falls, South Dakota.

The remarks came as stocks rallied worldwide today as better-than-estimated earnings at Wells Fargo & Co. boosted confidence in the financial system and speculation that American banks will pass government stress tests. Richard Fisher, president of the Dallas Fed bank, said yesterday that he’s also confident the central bank’s policies will expedite a recovery.

“While conditions in credit markets have improved over the past several months, in general appreciable strains persist,” Stern, the Fed’s longest-serving policy maker and an outspoken critic of bank bailouts, said during the speech at the South Dakota Economic Summit. Unless financial conditions improve, “such market failures threaten to prolong the recession.”

Still, “a resumption of growth should not be too far off” and “the initial stage of the recovery seems likely to be subdued,” he said. The $787 billion stimulus package signed by President Barack Obama in February is about the right size and should help the recovery, Stern said in response to questions after the speech.

Meeting Minutes

Minutes of the Fed’s last meeting in March show that policy makers feared the economy might fall into a self-reinforcing cycle of rising unemployment and slumping business and consumer spending, making credit tighter.

The conclusion prompted the Federal Open Market Committee to boost its open-market purchases of bonds by $1.15 trillion, continuing an unprecedented increase in money supplied to the economy.

The threat of deflation should diminish as growth resumes around mid-2010 and beyond, and “there is ample time to withdraw excess liquidity as appropriate,” Stern said.

Stern has led the Fed Bank of Minneapolis since 1985 and is the only member of the Federal Open Market Committee to serve with three central-bank chairmen: Ben S. Bernanke, Alan Greenspan, and Paul Volcker. He announced his retirement plans on April 2, saying he plans to leave within months.

The Minneapolis Fed is one of a dozen regional banks in the Fed system. Each year, four regional Fed presidents participate as on a rotating basis as voting members of the policy-setting FOMC, joining Bernanke, Fed governors and the president of the New York Fed. Stern does not vote on rates this year.

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net