Friday, 21 November 2008

Fed's Lacker: Reasonable to expect rebound in 2009

BETHESDA, Maryland (Reuters) - Richmond Federal Reserve Bank President Jeffrey Lacker said on Friday it is reasonable to expect the economy to reverse a downward track some time in 2009, and warned of inflation risks in any rebound.

"Many analysts expect the U.S. economy to regain positive momentum sometime in 2009," he said in a speech to the Tech Council of Maryland.

"That strikes me as a reasonable expectation," he said.

He said the downturn in the economy poses challenges for monetary policy in the period ahead, including a possible rise in inflation expectations.

"It's essential that we not let inflation drift from view," Lacker said.

"It may seem premature to be worrying about how inflation behaves after the recession is over, but we need to be sure our policy remains consistent with a strategy that does not allow inflation to ratchet up over the business cycle," he said.

Lacker, one of the Fed's most vocal inflation hawks, will be among the voters next year on the central bank's interest-rate setting panel.

Financial markets are in one of the most serious episodes of turmoil in decades, and major economies around the world have tipped, or are tipping into recession. U.S. stocks fell sharply on Thursday, taking the benchmark S&P 500 down more than 52 percent below its October 2007 record high.

The Fed has cut rates by 4.25 percentage points to 1 percent since September 2007 to put a floor under the faltering economy, and is expected to chop rates by another half-percentage point at its December 15-16 meeting.

Lacker argued the economy could be seen as ready to rebound next year.

Monetary policy is "quite stimulative," he said. Also, the major shocks that have dampened economic activity this year "have subsided already or are in the process of doing so," he added.

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