Tue, Feb 19 2008, 16:11 GMT
http://www.djnewswires.com/eu
THE FED: Risk Of Credit Crunch Worrisome, Fed's Stern Says
By Greg Robb
WASHINGTON (Dow Jones) -- The current economic environment is reminiscent of the early 1990s, when growth was held back by "headwinds" related to a lack of credit, said Minneapolis Fed President Gary Stern on Tuesday.
"The possibility of a credit crunch, and its attendant effects on economic performance, cannot be ruled out," Stern said in a speech to a business group in Minneapolis.
Stern said his definition of a credit crunch was: "an environment in which quality borrowers find credit either unavailable or available only on very expensive terms."
This issue is weighing on monetary policy makers, he said.
"The potential for headwinds is integral to thinking about economic prospects over the next year or two," Stern said.
"To the extent these headwinds gain momentum, they suggest relatively modest growth for a time and the likelihood of increases in the unemployment rate," Stern said.
Stern is the longest serving Fed bank president. He is a voting member of the Federal Open Market Committee this year.
It is possible that a credit crunch could last for an extended period.
"If credit is in fact restricted by some institutions and in some markets, it will likely take time for potential borrowers to find alternatives and substitutes," Stern said.
On a positive note, after a slow start and with appropriate monetary policy, the 1990s became a decade of growth, Stern said.
He said the implications of lack of credit for inflation "are not so clear," but noted the pace of inflation diminished in the early 1990s.
In the face of this risk, the aggressive easing campaign of the Bernanke Fed has been "wholly appropriate," Stern said. The Fed has cut rates from 5.25% last September to 3.0%.
Many economists believe the Fed is not done cutting interest rates. Stern's focus on the downside risks fits into this forecast.
"The Fed has a responsibility, insofar as possible, to restore financial stability and protect the real economy from collateral damage and policy is now better positioned to attain these objectives than formerly," Stern said.
Over the longer-term, Stern said he saw reason for continued optimism about labor productivity. He projected long run economic growth to average somewhere around 2.5% per year.
(END) Dow Jones Newswires
February 19, 2008 11:11 ET (16:11 GMT)
By Greg Robb
WASHINGTON (Dow Jones) -- The current economic environment is reminiscent of the early 1990s, when growth was held back by "headwinds" related to a lack of credit, said Minneapolis Fed President Gary Stern on Tuesday.
"The possibility of a credit crunch, and its attendant effects on economic performance, cannot be ruled out," Stern said in a speech to a business group in Minneapolis.
Stern said his definition of a credit crunch was: "an environment in which quality borrowers find credit either unavailable or available only on very expensive terms."
This issue is weighing on monetary policy makers, he said.
"The potential for headwinds is integral to thinking about economic prospects over the next year or two," Stern said.
"To the extent these headwinds gain momentum, they suggest relatively modest growth for a time and the likelihood of increases in the unemployment rate," Stern said.
Stern is the longest serving Fed bank president. He is a voting member of the Federal Open Market Committee this year.
It is possible that a credit crunch could last for an extended period.
"If credit is in fact restricted by some institutions and in some markets, it will likely take time for potential borrowers to find alternatives and substitutes," Stern said.
On a positive note, after a slow start and with appropriate monetary policy, the 1990s became a decade of growth, Stern said.
He said the implications of lack of credit for inflation "are not so clear," but noted the pace of inflation diminished in the early 1990s.
In the face of this risk, the aggressive easing campaign of the Bernanke Fed has been "wholly appropriate," Stern said. The Fed has cut rates from 5.25% last September to 3.0%.
Many economists believe the Fed is not done cutting interest rates. Stern's focus on the downside risks fits into this forecast.
"The Fed has a responsibility, insofar as possible, to restore financial stability and protect the real economy from collateral damage and policy is now better positioned to attain these objectives than formerly," Stern said.
Over the longer-term, Stern said he saw reason for continued optimism about labor productivity. He projected long run economic growth to average somewhere around 2.5% per year.
(END) Dow Jones Newswires
February 19, 2008 11:11 ET (16:11 GMT)
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