Fed officials hint recession in final stages

By Ros Krasny

MINNEAPOLIS (Reuters) - Top Federal Reserve officials hinted on Thursday that the long U.S. economic downturn could be in its final stages, although the early stages of recovery will likely be far from stellar.

Meanwhile, policy-makers showed a split on whether the Fed's current stance of aggressively pumping money into credit markets poses a major risk of stoking high inflation.

Dallas Fed President Richard Fisher, who terms himself the most pessimistic member of the Federal Open Market Committee at present, said the Fed's aggressive rescue efforts should soon stem the decline in growth.

Weakness could be tempered after the current quarter, which is likely to match the annualized contraction of 6.3 percent in gross domestic product seen for the dismal final quarter of 2008, Fisher said at a conference in Dayton, Ohio.

Gary Stern, Minneapolis Fed President, said that at least a mild recovery could take hold by mid-year before healthier growth kicks in during 2010.

"Many pieces are now in place to contribute to improvement in financial market conditions and in business activity," Stern told the Economic Club of Minnesota. "There is reason to think that improvement is not too far off."

Jeffrey Lacker, Richmond Fed President, offered recent increases in U.S. retail sales, lower gasoline prices and steady wages as signs for hope on the economy.

It is reasonable to expect the economy to hit bottom later this year and then begin a gradual recovery, Lacker said in Charleston, South Carolina.

Still, Dennis Lockhart, Atlanta Fed President, told Reuters in Paris that the recession would drag on for at least a few more months.

The significance of a recent run of better-than-expected economic data, including Wednesday's durable goods orders for February, should not be overstated, he said.

"One month does not make a recovery, so we have to be careful not to react too strongly," Lockhart said.

INFLATION BALANCING ACT

Some financial markets participants fear the Fed's provision of huge amounts of liquidity to support the economy will fire up inflation when the economy eventually recovers.

The Fed's balance sheet, which as recently as mid-September 2008 stood at about $1 trillion, is now more than $2 trillion.

Just last week, the Fed vowed to provide the economy with an additional $1.15 trillion, partly by buying government bonds for the first time since the 1960s.