More rate cuts likely as Fed official sees recession

Charleston: The struggling US economy is at risk of toppling into a shallow recession and may need more interest rate cuts to avoid one, a top Federal Reserve official said on Tuesday.

Richmond Federal Reserve Bank President Jeffrey Lacker said he thought the most likely outcome would be continued sluggish growth, as long as the job market did not sputter.

"I can also see the possibility of a mild recession, similar to the last two we have experienced - in other words, shallow and with a short recovery," he told a banking group. "If job growth is positive in the months ahead, and if wages can stay ahead of inflation, then income growth should be sufficient to support consumer spending gains and allow us to skirt the boundary of recession," he said.

Lacker, who is not a voting member of the Fed's policy-setting panel this year, said he took into account the risk of recession as he considered policy last month. The US central bank cut interest rates by an aggressive 1.25 percentage points in January.

Lacker said on Tuesday more rate cuts may be necessary to hold off a downturn. "The prominence of downside risks means that further easing ultimately may be warranted," Lacker said.

However, he added that if economic indicators are not weaker than expected over the next several months, "it's not clear further rate cuts would be warranted."

Indicators

Lacker's acknowledgment of the possibility of recession comes as econ-omic data increasingly point to weaknesses in the economy and is among the most pessimistic assessments of the US economy by a Fed official since private economists began warning about rising recession risks this year.

Fresh evidence of gloomy pros-pects for the US economy appeared earlier on Tuesday, as a survey showed the services sector retrenched sharply in January to levels not seen since the 2001 recession. Lacker told reporters after his speech that the services report bumped up the possibilities of recession.

A report that appeared after the Fed cut rates showed employers shed 17,000 jobs in January, the first decline in payrolls in four-and-a-half years. Lacker said there was some possibility that the underlying trend is stronger than those numbers suggest.