Fed officials see choppy recovery for U.S. economy

By Pedro da Costa and Kristina Cooke

AUSTIN/ATLANTA (Reuters) - High unemployment and reluctant consumers will likely make an incipient U.S. economic recovery weak and erratic, top Federal Reserve officials said in a string of speeches across the country on Tuesday.

That means interest rates, currently at historic lows close to zero, should remain near that floor for the foreseeable future, the policymakers said.

"The strength and durability of the expansion is in question," said Janet Yellen president of the Federal Reserve Bank of San Francisco, in Phoenix, Arizona. "High unemployment, weak job growth and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery."

Echoing her remarks, Richard Fisher, head of the Dallas Fed, flagged commercial real estate and a heavy reliance on government stimulus as other key risks.

"The more demand you steal from the future, the less future demand there is for you to steal," Fisher told the Austin Headliners' Club, a group of Texas business executives, lobbyists and politicians.

The U.S. economy grew 3.5 percent in the third quarter, unofficially emerging from its worst recession in generations. But the jobs picture remains dismal, with the unemployment rate surging to 10.2 percent in October, its highest level since 1983. A Reuters poll on Tuesday showed economists expect it to hit 10.5 percent in mid-2010 before subsiding. <ECI/LT>

LOW RATE RISK

Fisher said he was mindful of the possibility that the central bank's pledge to keep rates at rock bottom for an "extended period" could fuel unwanted speculative activity in financial markets.

"I am fully aware that the law of unintended consequences is lurking in the shadows," Fisher said. "Were this to become a disorderly influence, I would expect the FOMC and other authorities to craft an appropriate remedy," he said.

Pressed on the issue by reporters, he added: "Thus far, the dollar has not been in a disorderly depreciation."

Some analysts fear a more rapid fall in the U.S. dollar, which recently hit a 15-month low, could disrupt global markets.

The Fed slashed borrowing costs in response to the global financial crisis, and has pumped more than $1 trillion into the banking system. The White House and Congress also lent a hand with a $788 billion stimulus package of tax cuts and spending.

As key government programs like mortgage tax credits and car-buying incentives wane, private demand may struggle to fill the void, Fed officials said, particularly given the state of the labor market.

"At this juncture, it's hard to be encouraged about a fast rebound in job growth," said Dennis Lockhart, president of the Atlanta Fed.

Still, Lockhart said he could envision a scenario where the Fed might have to tighten policy even with unemployment "frustratingly high".