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June 16, 2009 – Comments (3)

Warsh Says Waning Crisis May Not Signal U.S. Recovery (Update1)
"The central bank is buying as much as $1.75 trillion of housing debt and Treasuries this year to lower borrowing costs across the economy after reducing the benchmark interest rate to as low as zero in December."

By Steve Matthews and Michael McKee

June 16 (Bloomberg) -- Federal Reserve Governor Kevin Warsh said that while financial turmoil has eased since March, there’s no assurance economic growth will resume this year.

“The panic’s hasty retreat should not be confused with robust recovery,” Warsh said today in remarks prepared for a speech in New York. “On balance, I would not be surprised if these countervailing forces, unprecedented public support and underwhelming private demand, fight to a draw by the fourth quarter.”

Fed policy makers meet next week amid indications the pace of a recession that began in December 2007 is easing, with housing starts rising more than forecast last month. A slowing contraction could prompt the central bank to keep its policy on hold, according to economists.

The central bank is buying as much as $1.75 trillion of housing debt and Treasuries this year to lower borrowing costs across the economy after reducing the benchmark interest rate to as low as zero in December.

“Notwithstanding recent encouraging signs that the contraction is abating, I would expect business capital expenditures and consumer spending to continue to disappoint for the next several quarters,” Warsh said at the Institute of International Bankers annual meeting.

“Even if, as I expect, the United States emerges from this recession sooner than our advanced foreign trading partners, I am still very cautious about predicting a sustained run-up in net exports so soon after the virtual collapse of global trade,” he said.

‘Weak’ Market

The Fed said last week the downturn may be slowing in almost half of its regions, though a “weak” labor market persists. Fed Chairman Ben S. Bernanke told Congress this month while the contraction is easing, “sizable” additional job losses will weigh on consumer spending. The U.S. lost 345,000 jobs in May, the smallest decrease in eight months.

“Unemployment rates, in my judgment, are likely to remain higher and linger longer than in recent recessions,” Warsh said. “The ‘jobless recovery’ may prove to be a familiar and vexing refrain.”

Warsh cautioned politicians and policy makers against overreacting to the recession by imposing rules and regulations that limit risk-taking.

The boom years of the 1990s and earlier this decade produced “significant” improvements in productivity that led to “remarkable” increases in living standards and prosperity, he said. In dealing with the bust that followed, policy makers shouldn’t lose sight of the gains, he said.

“We must be wary of macroeconomic policies that, in the name of stability, may have the effect of lowering trend growth and employment rates,” Warsh said. “We must recognize that the singular pursuit of stability, however well-intentioned, may end up making our economy less productive, less adaptive, and less self-correcting, and in so doing, less able to deliver on its alluring promise.”

To contact the reporter on this story: Steve Matthews in Atlanta at smatthews@bloomberg.netMichael McKee in New York at mmckee@bloomberg.net