How the U.S. addresses the economic challenges it faces will determine the length and depth of the current recession, according to Federal Reserve Bank of Kansas City president Thomas M. Hoenig. “There are no shortcuts to stability, no painless methods to adjusting our saving-spending mix and returning to prosperity,” he warned yesterday.
He recalled that in his previous speech before the Central Exchange a year ago, he suggested the country could avoid a recession. “The sad truth is that over the past year, the economy has been affected by several shocks — the further decline in housing, the turmoil in financial markets, and a sharp drop in consumer and business confidence,” according to prepared text of the speech released by the Fed.
Hoenig added that he sees contraction continuing for much of the year. “Putting all of the pieces of the outlook together, the picture for the last quarter of 2008 and at least the first half of this year is grim,” he said. “The magnitude of the downturn is likely to surpass that of the 1990 and 2001 recessions.”
To repair the economy, Hoenig said, there must be a rebalancing of domestic savings and investment. “This rebalancing process and the length and depth of the recession itself will be determined importantly by how quickly financial firms, businesses, and the consumer rebuild their diminished wealth and regain their confidence,” he added. “It will be influenced also by the Federal Reserve’s unprecedented actions and funding programs and forthcoming fiscal initiatives.”
While Hoenig advocated doing “all we reasonably can to revive the economy,” he cautioned “that in our haste to mitigate this recession’s effects,” all efforts must be made to avoid “shortcuts that put at risk future stability and growth.”
Additionally, he warned that leaving monetary policy “extremely accommodative” for too long could lead to inflation pressures in a recovering economy.
