Richmond Federal Reserve Bank President Jeffrey Lacker expressed cautious optimism Monday, predicting that the U.S. economy will switch from contraction to expansion by the end of 2009. The recession remains severe, Lacker said, but added he is on the lookout for the decline to hit bottom late in the year before embarking on a slow recovery.

Powering the expected recovery is the resilience of the U.S. consumer as well as the unprecedented actions taken by the Federal Reserve in the face of the most severe financial crisis since the Great Depression.

While overall activity is still contracting, it now appears as if the pace of contraction is diminishing, and at some point later this year, activity will bottom out and begin expanding again, Lacker said.

His remarks echoed the sentiment expressed by the Federal Open Market Committee last week, of which Lacker is a voting member.

The policymaking arm of the Federal Reserve voted unanimously to keep the target range between 0 and 0.25 percent, in an announcement that was largely unchanged from the March decision. Demonstrating cautious optimism, the FOMC noted that the economy has continued to contract, though the pace of contraction appears to be somewhat slower.

Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time, the statement read.

The Federal Reserve left the amounts associated with quantitative easing steady, despite some thoughts that they would increase the amount of treasury securities they are planning to purchase. However, the Fed announced that they will have purchased $300 billion in longer-term treasury securities by autumn.

The Fed reiterated its plans to purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year.

Once again, the FOMC said that interest rates will remain exceptionally low for some time, adding that they will employ all available tools to promote economic recovery and to preserve price stability.

That recovery scenario is hotly debated, but Lacker said he predicts that at some point, despite rising unemployment consumers will become more confident about an eventual recovery and begin to spend more.

In addition, the housing market appears to be stabilizing after the greatest housing crisis since the Great Depression.

If the emerging stability in housing and consumer spending persists, as I expect, some segments of business investment spending should bottom out by the end of the year and economic growth then would turn positive, he said.

Looking ahead, Lacker said that while he does not expect inflation to get out of control, keeping prices stable as the economy begins to turn around will be a challenge for the Fed.

Choosing the right time to withdraw that stimulus will be a challenge, and I believe it will be very important to avoid the risks of waiting too long or moving too slowly, Lacker said.

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