By Steve Matthews and Timothy R. Homan
May 29 (Bloomberg) -- Federal Reserve Bank of Dallas President Richard Fisher said the U.S. slump will probably persist until next year as consumers restrain spending, while the outlook for inflation remains “meek.”
The economy faces a “very slow slog” to recovery, Fisher said yesterday in a speech in Washington. The recession “will moderate in the current quarter, and then we are likely to bounce along the bottom for a while,” with sustained growth doubtful before the end of this year, he said.
Fisher urged Congress not to “politicize” the central bank by taking a role in selecting Fed district bank presidents. Some lawmakers suggested such a role over concerns that Stephen Friedman, former chairman of the New York Fed’s board of directors, also served as a director of the board of Goldman Sachs Group Inc. Friedman quit the Fed post this month.
The central bank may step up purchases of assets to secure a stronger economic recovery, minutes of the April 28-29 meeting released last week showed. The Fed’s Open Market Committee voted unanimously to keep unchanged its targets for purchases of housing debt and long-term Treasuries amid signs the economic contraction may be easing.
“We’re not done with that program,” Fisher said in response to an audience question after the speech, referring to plans to buy $300 billion in Treasuries.
Fisher repeated his view that the U.S. unemployment rate will reach 10 percent, more than most of his colleagues. Fed officials projected a deeper U.S. contraction with a 9 percent unemployment rate lasting through the end of 2010, according to the minutes.
More Pessimistic
Fisher’s view on the economy is more pessimistic than private forecasters. The U.S. recession will probably end in the third quarter, according to a survey by the National Association for Business Economics.
The economy will shrink at a 1.8 percent annual rate from April to June, and then grow at a 0.7 percent pace in the next three months, the survey showed. Growth will accelerate to a 1.8 percent rate by the final quarter.
“Given the vast amount of slack worldwide, the near-term outlook for inflation is meek,” Fisher said to the Washington Association of Money Managers. “Indeed, the recent pressures have been to the deflationary side. It is doubtful that inflation will raise its ugly head until employment and capacity utilization tighten.”
Fisher dissented five times against easing of monetary policy in 2008 because of concern over higher prices, giving him the reputation as one of the most “hawkish” of U.S. policy makers.
‘Aware of Doubts’
The Fed official said he was “well aware of doubts” that some analysts have expressed about the Fed’s ability to withdraw its monetary stimulus to keep prices from rising too much, saying the central bank is now “studying ways to unwind our balance sheet in a timely way.”
“There are concerns in some quarters that the Federal Reserve will be politicized,” Fisher said. “For example, there have been suggestions that Congress should be involved in the selection of Federal Reserve Bank presidents.”
“I trust that Congress will resist this initiative and not upset the careful federation that has for so long balanced the interests of Main Street with those of Washington,” he said.
Stable Relations
Fisher, answering an audience question, said China has become dependent on stable relations with the U.S. in finance and other areas.
“They have no desire to inflict harm on the United States because they would inflict harm on themselves,” he said. The interests of China and the U.S. are “interconnected and intertwined.”
The Fed official cited some “green shoots,” Fed Chairman Ben S. Bernanke’s term for signs of recovery, while adding the sprouts are not “spreading like kudzu.”
In the past few weeks, reports have pointed to a thawing in credit markets and an easing of the pace of the recession that began in December 2007.
Home resales in the U.S. rose for the second time in three months in April as foreclosure auctions and cheaper prices spurred bargain hunters, the National Association of Realtors reported May 27.
Confidence among U.S. consumers jumped in May by the most in six years, according to the Conference Board’s sentiment index. Manufacturing in the Philadelphia region contracted in May at the slowest pace in eight months as shipments and employment improved, the Philadelphia Fed reported.
To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Timothy R. Homan in Washington at Thoman1@bloomberg.net
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