Richmond Fed’s Lacker Says Mild Recession Possible

The economic forecast for 2008 has weakened in the past six months and downside risks rose, leading Federal Reserve Bank of Richmond president Jeffrey M. Lacker to remark yesterday that a mild recession is possible, but if there are no surprises, the Fed could be done with rate cuts.

“Clearly, economic activity has been softening,” Lacker said in prepared remarks before the West Virginia Banker’s Association released by the Fed. “I can also see the possibility of a mild recession, similar to the last two we have experienced — in other words, shallow and with a slow recovery. What I don’t expect is a more severe recession, like those we saw in 1982 or 1974.”

“Keep in mind that monetary policy has moved aggressively in recent months, and that inflation-adjusted interest rates are now very low by historical standards,” he added. “That by itself won’t solve all our problems, but it will help support activity enough to at least avoid the worst outcomes, and possibly avoid a recession altogether.”

“In my view, the prominence of downside risks means that further easing ultimately may be warranted. My expectation that growth is likely to be sluggish this year figured prominently in my thinking about policy last month, however, so if incoming data is not weaker than expected over the next several months, it’s not clear further rate cuts would be warranted,” Lacker said.

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