Breaking: Top Federal Reserve Official Warns Of False Optimism on US & Global Economy

Discussion in 'Economics' started by ByLoSellHi, Jun 16, 2009.

  1. Fed's Warsh warns of false optimism on U.S. economy
    Tue Jun 16, 2009 1:51pm EDT

    By Ros Krasny

    NEW YORK (Reuters) -
    A top Federal Reserve official warned on Tuesday not to take recent gains across a range of asset prices as proof the U.S. economy is on the verge of a strong recovery.

    "The panic's hasty retreat should not be confused with robust recovery," Federal Reserve Governor Kevin Warsh said in prepared remarks to the Institute of International Bankers annual meeting in New York.

    "The rather indiscriminate bounce off the bottom -- across virtually all assets and geographies -- may be more indicative of a one-time reset, which may or may not be complete."

    Warsh said private demand, the true arbiter of economic performance, "remains weak" even while government spending has surged, and the the jobless rate is likely to peak at a higher rate, and linger longer at those high rates, than in recent recessions.

    "The 'jobless recovery' may prove to be a familiar and vexing refrain," he said.

    "I would expect business capital expenditures and consumer spending to continue to disappoint for the next several quarters," Warsh added.

    Rising exports will also not provide an easy way for the U.S. economy to return to growth, he said. "The global economy runs the risk of being mired in a period of slower growth for several years to come."


    Looking forward, the Fed "will not ... compromise price stability" by monetizing large U.S. budget deficits, he said, warning that higher interest rates were a risk.

    "Financial markets may extract penalty pricing if fiscal authorities are unable to demonstrate a credible return to sustainable budgets," the policy-maker said.

    The Fed will be operating at a time when political pressures call for "still more-aggressive macroeconomic policies," Warsh noted.

    Warsh did not foresee the fast end to the recession that many economists now anticipate, but looked for the huge fiscal and monetary stimulus to finally kick in.

    "On balance, I would not be surprised if these countervailing forces -- unprecedented public support and underwhelming private demand -- fight to a draw by the fourth quarter," he said.


    Warsh also warned of a trade-off between policies designed to create stability, especially after the tumult of the past couple of years, and the overall prospects for the U.S. economy.

    "Stability is a fine goal. But it's not a final one," he said. "We must be wary of macroeconomic policies that -- in the name of stability -- may have the effect of lowering trend growth and employment rates."

    In particular, to the extent that changed policies reduce potential growth, or raise the natural rate of unemployment above the 5 percent rate assumed for many years, "it is more difficult to make good and timely policy," said Warsh.

    (Editing by Neil Stempleman)
  2. US markets could be like Nikkei from '92-'99. Wide range... about 14,000 to 22,000. I'm sure there was optimism and hope during the upswings... reality and disappointment during the downswings.... ultimately broke down to 7,000s...
  3. Now there's a real "when monkeys out of your butt" possibility, if ever there was one.
  4. +1

    Or we could just say 'the government will return to surplus when monkey jump directly out of our assholes.'
  5. Illum


    "The rather indiscriminate bounce off the bottom -- across virtually all assets and geographies -- may be more indicative of a one-time reset, which may or may not be complete."

    Is this Fed speak for dead cat bounce?
  6. S2007S


    Exactly, many believe that since we are seeing a rising stock market that the economy is once again ready for a recovery, however many will be taken by surprise when they realize a decade from now they will still be able to buy the s$p 500 under 1000. The US economy will experience a lost decade just like Japan did in the 90's. How anyone can find a catalyst for another bull market is beyond me. As I said many times the last 20 years was built on false impressions of economic success. The feeling of unlimited wealth gave everyone that feeling that great times were here to stay, those times have changed and anyone thinking we are going to experience another 20 years of economic expansion will be really surprised by the fact that the only way to create economic success is through bubbles.