View of economy somber from Fed mountain retreat
By Alister Bull and Mark Felsenthal
Saturday, August 23, 2008; 6:55 PM
JACKSON HOLE, Wyoming (Reuters) - A towering grizzly bear guards the doorway to the Federal Reserve's annual policy retreat in this Teton Mountain resort, serving a reminder to central bankers of the battle to sooth the credit crunch.
"This turmoil is not going to go away quickly and will require serious efforts to overcome it," a top official of the International Monetary Fund, John Lipsky, told Reuters.
"A year ago there was a real sense of uncertainty and confusion. People were perplexed by the turmoil that had come on quite suddenly. I would say the mood this year is one of greater clarity...let's call it a bit more somber," said Lipsky, the IMF's first deputy managing director.
The annual symposium hosted by the Kansas City Federal Reserve has drawn senior officials from the world's most powerful central bankers, including Fed Chairman Ben Bernanke and European Central Bank President Jean-Claude Trichet.
Fed officials say that it will take a prolonged period for the harm done to confidence by the collapse in the U.S. housing market to wash through the system. Bernanke acknowledged that there would no quick fix.
"The financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent," Bernanke told the conference on Friday.
Lipsky said the U.S. economy might contract slightly in the second half of the year. Even if it skates the generally accepted rule of thumb for a recession -- two consecutive quarters of contraction -- he warned it will suffer a clear period of sluggish growth, with the IMF forecasting growth of 1.3 percent this year and 0.8 percent in 2009.
Others at the conference had no doubt that the U.S. economy was heading for a nasty knock.
"That's where we are today, in the middle of a financial crisis, with the economy sliding into recession, with monetary policy at maximum easing, and fiscal transfers impotent," said Harvard economist Martin Feldstein, until recently head of the National Bureau of Economic Research.
Rising food and energy costs have pressured inflation and limited the Fed's scope to cut interest rates further, following aggressive easing since last year that slashed rates by 3.25 percentage points to 2 percent.
"More than a year into the most challenging financial crisis of our times we now face a complex and interlocking combination of rising inflation, declining growth, tightening credit conditions, and widespread liquidity tensions," ECB governing council member Mario Draghi told the conference.
Draghi, who is also governor of the Bank of Italy, warned it would take the next few years for the financial markets to recover their confidence, forecasting tough times ahead.
"These adjustments will not be painless, and ensuring that they take place in an orderly manner will pose substantial challenges for policymakers," he said.
(Writing by Alister Bull, editing by Leslie Adler)
© 2008 Reuters