MIAMI The battered U.S. economy will continue to weaken over the coming months, with unemployment rising, top Federal Reserve officials said on Wednesday, though they remain confident that forceful policy action will help end the more than year-long recession.
Dennis Lockhart, president of the Atlanta Federal Reserve Bank, said it was hard to "be upbeat about the immediate future."
Richard Fisher, president of the Dallas Fed, said indicators show the economy to be on track for a decline in the first quarter roughly equal to the 6.2 percent annual rate of contraction seen in the 2008 fourth quarter.
Fisher, who characterized himself as the most pessimistic of all of his colleagues on the Fed's policy-setting Federal Open Market Committee (FOMC), said he fears the country might suffer two years of recession.
The current recession started in December 2007.
Lockhart, however, said he still expects the economy to begin a modest recovery in the second half of the year.
That said, Lockhart painted a gloomy picture near-term.
"Looking broadly at the national economy, the recent numbers have been discouraging," Lockhart told the Greater Miami Chamber of Commerce.
"Other incoming data give little reason to be upbeat about the immediate future. Unemployment continues to rise," said Lockhart, who is a voting member of the Federal Open Market Committee this year.
He later said he was apprehensive about the government's February jobs report, which is due on Friday.
"I'm concerned that this, too, will show some job destruction, substantial job destruction and the unemployment rate will rise," Lockhart told public television's "Nightly Business Report."
Analysts polled by Reuters expect a loss of 648,000 jobs last month, compared with a 598,000 loss in January, with the U.S. unemployment rate rising to 7.9 percent from 7.6 percent.
Lockhart said the outlook was more unclear than usual and deteriorating financing conditions for the commercial real estate sector could add to the strain on battered banks.
"Problems in residential real estate are well known. But, with continued economic weakness, I'm increasingly paying attention to commercial real estate," he said.
"Declining commercial real estate markets could put further pressure on already strained financial institutions and markets. And overcoming problems in the financial sector is central to achieving economic recovery," he said.
Fisher, speaking in Fort Worth, Texas, called 2008 "an annus horribilis -- a truly horrible year that only a sadist could look back upon with pleasure.
"We might call this the Godzilla economy -- it presents a monstrous challenge," said Fisher, who is not a voting member of the FOMC this year.
Noting the economy's decline at a 6.2 percent annual rate in the fourth quarter, he said: "All indicators thus far point to our economy being on track for a decline of roughly the same magnitude in the first quarter of 2009."
The Fed has cut interest rates to almost zero and more than doubled the size of its balance sheet to around $2 trillion through programs to support private lending in a bid to prevent the downturn from steepening.
Lockhart stressed that Fed moves to steady the ability of households to tap credit markets have gained traction and said the Fed would do what it takes to restore U.S. growth.
"I want to assure you that the Fed has the capacity to act, even with the federal funds rate near zero, with the aim of returning the country as quickly as possible to its enormous potential for growth and prosperity," Lockhart said.
Fisher also found notes of optimism in discussing the potential impact of the Fed's new Term Asset-Backed Loan Facility, which is designed to revive lending to consumers and small businesses. He said there is already an improved "tone" to many of the asset-backed securities markets that will reside under the TALF umbrella.
Some economists, however, worry that the hefty expansion of the U.S. monetary base will be inflationary at some point, and this concern is shared by hawks on the Fed's top policy committee.
Kansas City Fed President Thomas Hoenig cautioned the massive stimulus would require the Fed to tighten monetary policy well before the next economic expansion was fully under way, to prevent a powerful inflation from taking root.
Waiting until a recovery is obvious would mean that the monetary policy reaction was already lagging.
"Once you know there's a recovery -- you're convinced of it -- it's probably too late to really avoid the future inflationary or whatever speculative bubble might be coming our way," Hoenig, a voting member of the Fed's policy committee next year, told Market News International.
However, most economists see the debate about raising Fed rates as a luxury that can wait until next year at the earliest, and the Fed has stressed it will hold its overnight funds rate benchmark near zero for "some time".
Indeed, U.S. economic conditions worsened in January and February and businesses do not expect improvement until late this year or early 2010, the Fed said in its Beige Book economic summary gathered from districts around the country.
The rapid decline in U.S. growth is already the worst since the early 1980s and there is no recovery yet at hand.
(Additional reporting by Ros Krasny in Fort Worth, Texas and Mark Felsenthal in Washington; Editing by Leslie Adler)