The U.S. economy should slowly begin recovering in the second half of 2009, with inflation remaining below 2 percent over the year, the president of the Federal Reserve (Fed) Bank of Philadelphia said Wednesday. In a speech at the University of Delaware, Charles Plosser also said the U.S. unemployment rate probably will not fall anytime soon, but that he does not expect it to rise above 10 percent, as it did during the early-1980s recession. “I expect the housing sector will finally hit bottom in 2009, and the financial markets will gradually return to some semblance of normalcy,” Plosser said, adding that the current recession could be one of the longest since the 1940s. However, Plosser warned that the central bank's unprecedented decisions to reduce a key interest rate to near zero and provide new lending in an effort to stabilize troubled financial markets pose several challenges tot eh Fed. “Since we are in uncharted territory, I believe we must proceed with some caution,” Plosser said. “While the lending programs are designed to improve the flow of credit, they are currently injecting enormous amounts of liquidity into the economy. I believe we need to monitor that liquidity and its composition closely so that we are able to withdraw it when the time comes or else we risk fueling inflation in the future,” Plosser said.
