RTTNews - A top central bank official said Tuesday that the first part of an economic rebound has begun, though he warned that regulatory fixes are needed in order to ensure longer-term stability.

Speaking to business leaders in Helena, Montana, Minneapolis Federal Reserve Bank President Gary Stern pointed to signs of stabilization in consumer spending and in manufacturing activity, as well as in some parts of the housing market, as signs that economic activity is moving away from recession, albeit slowly.

However, Stern warned that swings in asset prices might cause problems in the future, and argued that more needs to be done to solve the too-big-to-fail problem that many experts believe helped lead to last year's financial crisis.

I think that the first stage of economic recovery is close at hand, largely because the inventory liquidation process is proceeding as anticipated and because there are signs of stabilization in consumer spending, manufacturing, and some measures of housing activity, Stern said.

He added that adjustments that have been made in the contraction have helped to lay the foundation for renewed growth.

Stern said low interest rates, aggressively expansionary monetary policy and improving financial conditions are setting the stage for an economic recovery.

However, Stern warned that recovery would be quite modest due to strained credit conditions, excess capacity and sizable job losses.

Moreover, the Minneapolis Fed president worried that large swings in asset values could cause problems.

More worrisome to me is the potential - I would emphasize that at some point in the future - for further, sharp volatility in asset prices, where the Federal Reserve does not have a track record of success in curbing excesses, Stern said.

Stern finished by commenting on a recent Department of the Treasury proposal for regulatory reform, arguing that it fails to come to grips with the problem that certain institutions have been allowed to become too big to fail, leaving taxpayers with the decision of bailing out behemoth companies when they get into trouble or facing significant economic threats.

I would describe the Treasury plan as it pertains specifically to TBTF as status quo plus - more capital, more liquidity, better supervision, far-reaching resolution authority for the largest institutions, he said, In fact, there is nothing in the Treasury proposal designed to put creditors of large, systemically important financial institutions at risk of loss.

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