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Worst of US economic downtown is 'likely over'

TOP United States officials told a weekend conference in Nashville that the worst of the economic downturn is likely over, helped by unprecedented efforts to keep credit flowing, but the recovery will be slow.

Two Federal Reserve policy-makers - Vice Chairman Donald Kohn and New York Fed chief William Dudley - both pointed to signs that measures taken by the US central bank are working to help revive the economy.

Paul Volcker, a senior economic adviser to the Obama administration and a former Fed chairman, told the conference of policy makers and academics at Vanderbilt University the rate of the economy's decline is set to slow but the economy faces a "long slog" toward recovery.

Fed officials often stress there is a lag before the economy responds to measures taken to support growth, such as interest rate cuts, and that lag times can vary.

Since the financial crisis erupted in 2007 the Fed has slashed its benchmark lending rate from a peak of 5.25 percent, reaching the current range of zero to 0.25 percent in December 2008.

The Fed has also created an alphabet-soup of programs to support credit markets and revive lending in different segments, especially home mortgages.

While the central bank's emergency measures have caused the Fed's balance sheet to balloon to over US$2 trillion, Kohn and Dudley dismissed worries the measures could lead to inflation down the road, saying they have plenty of tools to drain excess cash from the system when necessary.

Life support

Volcker, known for aggressive interest rate hikes to combat spiraling inflation when he was the Fed chairman in the 1980s, said the unprecedented tumble in economic activity in late 2008 may not have left the US in a Great Depression but has left it "in a great recession for sure."

"None of us has seen a decline in economic activity at the rate of speed seen late last year," he said.

Most economists see the fourth quarter of 2008, when gross domestic product shrank by 6.3 percent, and the just-ended first quarter of 2009 as the low point.

Kohn stressed that the current recession is "global, and will require a global response." He said the era of relying on the free-spending US consumers was over and that the phenomenon was "never sustainable."

Now, "US consumers are pulling back, obviously, and are going to be amassing savings by not spending," he said.

But even with the US now in its sixth quarter of recession, Kohn said the central bank's attempts to heal ailing credit markets and spur an economic recovery have been working gradually.

"The situation in financial markets and the economy would have been far worse if the Federal Reserve hadn't taken the actions we did," he said.

Volcker, meanwhile, said troubles in the financial system continue to work against the economy, and vice versa: "The lack of a good strong recovery works against a strong financial system."

The financial system, he said, "is not quite comatose but it's on life support."


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