Fed officials see slow recovery, slack economy

By Mark Felsenthal

MORGANTOWN, West Virginia (BestGrowthStock) – U.S. Federal Reserve officials said on Tuesday the economy is operating well below full capacity and full recovery is a way off, in comments suggesting no urgency to begin tightening financial conditions.

“The pain is still with many of us to be sure, and we are a long way from a full recovery,” Richmond Federal Reserve Bank Jeffrey Lacker told a regional Fed forum.

Lacker, known to be one of the more aggressive anti-inflation hawks among policy-makers, said there were signs of stabilization in housing markets, but overbuilding means that sector won’t help lift the recovery.

He said news that employers added 162,000 jobs in March was one of the most encouraging recent signs of economic healing, however he added that while the labor market seems to be lifting itself off the floor, rapid growth in employment this year seems unlikely.

Another Fed official said there is little inflationary pressure in the economy that is operating well below its potential.

“There are a lot of people who are unemployed, there are a lot of factories that are not producing at full steam, so we have excess slack,” Dallas Fed Bank President Richard Fisher said in an interview with Fox Business Network.

Neither official is a voter this year on the Fed’s interest-rate setting Federal Open Market Committee. Fed Chairman Ben Bernanke is scheduled to discuss the economic outlook in congressional testimony on Wednesday.

Bernanke did not talk about the economy or monetary policy in a speech on financial education on Tuesday.

Lacker’s comments were somewhat more downbeat about the pace of recovery than in the past, suggesting pressure within the Fed to begin tightening financial conditions may be subdued.

On Tuesday, he said inflation remains benign, although he stressed that the risks of a sharp decline in inflation had diminished.

The Fed is not expected to change its commitment to hold rates exceptionally low for an extended period at a meeting at the end of the month. It has held benchmark borrowing costs near zero since December 2008.

Some Fed officials would like to raise the discount rate, the level it charges banks for short-term loans, a Fed report showed on Tuesday. The Fed has taken pains to stress that the raising the discount rate nearer to pre-crisis levels signals a normalization of lending, not a tightening of financial conditions.

Another Fed official, Fed Governor Daniel Tarullo, focused on financial regulation reform in comments that did not address the economic outlook.

Regulators should consider conducting routine, publicly disclosed “stress tests” to gauge how well big financial firms could weather a crisis, he said.

Tarullo, the central bank’s point person on regulatory reform, said releasing the information would help investors make informed decisions, and encourage public scrutiny of the regulators’ methods.

The Fed led stress-testing of the 19 largest U.S. financial firms last year and disclosed the results, a controversial decision even inside the central bank. The concern was that weaker banks might be harmed by the public disclosure.

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(With additional reporting by Walter Brandimarte in New York and Emily Kaiser in Washington)

Fed officials see slow recovery, slack economy