May 13, 2008 / 7:57 PM / 12 years ago

Fed's Stern says recession likely: WSJ

WASHINGTON (Reuters) - The economy may face subdued performance for the next two quarters and probably cannot avoid a recession, Federal Reserve Bank of Minneapolis President Gary Stern said in a Wall Street Journal interview on Tuesday.

When asked whether a recession was avoidable, Stern replied, “No. But there are recessions and then there (are) recessions,” according to the Journal’s website. “The previous two were short, and the most recent one was not only short but shallow.”

Stern said the current economic environment was similar to the early 1990s when a reluctance to lend weighed on the economy, the Journal reported.

“It took some time for that to all dissipate,” he said. “There was a lot of concern about the initial sluggishness of the recovery ... I personally expect that’s going to be turn out to be the case here as well.”

Stern defended the central bank’s intervention to prevent the bankruptcy of Wall Street firm Bear Stearns as “appropriate because the potential costs of not acting were potentially very, very high.”

He said there was “no going back” from the Fed’s decision to provide credit to primary dealers and not just depository institutions.

“That’s not to say that the current (Fed lending) facilities are going to be permanent or anything. But the precedent’s been set,” he said.

Stern also said that in hindsight the Fed may have held interest rates too low for too long earlier this decade.

Editing by James Dalgleish

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