The U.S. economy has pulled back from the edge of the abyss but the recovery will be very slow as Americans' find an equilibrium between the often voracious consumption of past years and a new-found focus on savings, Federal Reserve policy-makers said on Friday..
Adding support to the economic outlook, the threat of a resurgence in inflation is meek for now and the U.S. central bank has kept recent deflationary pressures at bay, Richard Fisher, president of the Dallas Federal Reserve Bank, said.
I envision a slow recovery. Not a V-shaped snapback, nor even a U-shaped one, but a very slow slog as we find a more sensible and sustainable mix between consumption and savings and investment, Fisher told a Texas Bankers Association meeting in San Antonio.
The recovery will likely be shaped like a check mark with a very slow upward tilt, Fisher told reporters after his speech, while noting that there's always a risk of some exogenous shock.
Still, the initiatives taken by the Fed since 2007, and especially in the past year, have prevented us from falling into the chasm of an economic depression, he said.
Gary Stern, president of the Minneapolis Fed, was also optimistic and also credited the Fed for the turnaround.
Stern said the brighter picture is due to the Fed's actions to cut interest rates and pump vast amounts of money into financial markets, some stabilization in consumer spending, and improved credit market conditions.
I think that here have been a number of more favorable developments in recent months that suggest we are nearing the bottom of the recession, Stern said on Bloomberg Television.
He said the initial stages of the recovery are likely to be subdued as Americans deal with a multi-trillion dollar decline in household wealth.
Fisher agreed. Consumers are rebalancing ... we're going to have to drive our economy to a lesser degree by consumption, and what that means is a slower path to recovery as we find that balance.
Neither Stern nor Fisher is a voting member of the Federal Open Market Committee, the Fed's policy setting-body, in 2009. Stern, the Fed's longest-serving regional president, has announced he will retire this summer.
Fisher, who recently termed his outlook for the economy the most gloomy among his Fed colleagues, seemed more upbeat on Friday.
There are, as many have noted, some 'green shoots' that have begun to sprout that will help end the contraction in output and set the stage for a recovery, he said.
Positive elements include an apparent slowing in the pace of job losses, a pick-up in sales at trucking companies, and a less severe decline in new orders cited by purchasing managers.
At the same time, gradual healing in the financial markets has been marked by a recent dramatic decline in the London interbank offered rate, which is the most widely used benchmark for short-term interest rates.
The drop in Libor has enlivened housing markets and interbank lending, and will make the next wave of resets to adjustable interest rate mortgages easier to digest, said Fisher.
I was worried about that bubble of resets, he said. We've driven mortgages down. Libor has come down. It's very important. Ultimately, lower mortgage rates will help push housing demand back up, he said.
Fisher told reporters he had been thanked in a coffee shop last week by a homeowner who had just reset her mortgage rate to 4.3 percent from 6.7 percent.
It's very unusual for a banker to be thanked for anything these days, he quipped.
Fisher termed the near-term inflation outlook meek and said the U.S. central bank had also beaten back deflationary pressures that had loomed until recently.
The economy's wide output gap, or the gulf between current and potential production, was key, he said. It is doubtful that inflation will raise its ugly head until employment and capacity utilization tighten.
Still, the Fed must plan appropriately to reverse the monetary initiatives that have flooded credit markets with billions of dollars to help jump-start the economy, or risk igniting inflation later, Fisher said.
The FOMC can ill afford to be perceived as monetizing that debt, lest we come to be viewed as an agent of, rather than an independent guardian against, future inflation, he said
As well implementing a panoply of credit programs, the Fed has held its key interest rate near zero since December and suggested the rate will stay extremely low for some time.
Stern, meanwhile, warned that authorities should tread lightly in strengthening financial oversight and avoid stifling innovation with overly restrictive measures. But he said reforms just wait for the financial situation to stabilize.
(Additional reporting by Mark Felsenthal in Washington; Editing by Leslie Adler)