Recession more severe than thought: Fed’s Rosengren

The U.S. recession looks to be longer and more severe than originally thought, but there are signs that the economy will improve in the second half of 2009, a top Federal Reserve official said on Thursday.

“It appears the economy contracted quite significantly in the final quarter of 2008 and may continue contracting over at least the first half of 2009. We are seeing businesses retrenching and unemployment rising,” Boston Federal Reserve Bank President Eric Rosengren told the Massachusetts Mortgage Bankers Association’s Annual Meeting.

“As a result, this recession looks to be longer and more severe than originally forecast. Still, there are indications that the second half of the year will show improvement,” he said.

(ARTICLE CONTINUES BELOW)

Lower energy prices and concerted monetary and fiscal policy efforts should set the stage for a recovery later in 2009, he said.

“Energy prices have fallen dramatically, making it much less expensive to drive cars or heat homes,” he said, “Fiscal stimulus packages being discussed in Washington could provide an economic boost. And monetary policy is also contributing,” he added.

• A d v e r t i s e m e n t

The Federal Reserve last month cut its benchmark fed funds rate to a range of zero to 0.25 percent after an aggressive rate cutting cycle and has rolled out a raft of unprecedented liquidity programs to support key credit markets in its effort to battle the worst financial crisis in 80 years.

“While all these developments will take time to fully impact the economy, they should be sowing the seeds of a recovery later in 2009,” he said.

Rosengren said recent actions by the Fed to reduce mortgage rates, such as its agency mortgage-backed security and agency debt purchases, have driven mortgage rates down.

The plethora of other emergency liquidity facilities have also had a positive effect on credit markets, Rosengren said.

Full article here