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Fed's Hoenig sees sluggish U.S. recovery ahead

Wed Jul 15, 2009 11:23am IST
 
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By Alister Bull

KANSAS CITY (Reuters) - The U.S. recession is almost over but the recovery will be very slow, a top Federal Reserve policy-maker said on Tuesday, while warning that even in this climate inflation is a long-term threat that should not be ignored.

"I judge the economy at or near the bottom of the cycle," Thomas Hoenig, president of the Kansas City Federal Reserve Bank, told Reuters in an interview.

"I am not suggesting a V-shaped cycle," he said, referring to a quick bounce back. "I think ... it will be a very slow recovery, given the seriousness of the problems in the financial industry and the slowness with which the capital in those institutions will be rebuilt," he said.

Hoenig, one of the U.S. central bank policy-makers who tends to be more hawkish on inflation, said U.S. economic growth would probably remain beneath its so-called long-term potential next year, and only return to this healthy level in 2011.

But even with plenty of slack in the economy, he said inflation must not be ignored or it could become a problem in four or five years' time.

"There are two things we can do wrong. One is pull it out too soon, the other is pull it out too late," he said, referring to the Fed's policy measures designed to stimulate the economy. Hoenig will have a voting seat on the Fed's policy panel next year.

The Fed has cut overnight interest rates to near zero and pumped a trillion dollars into credit markets to prevent them freezing since the failure last September of investment bank Lehman Brothers sparked a global financial crisis and severe U.S. recession.

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