WisBusiness: Chicago Fed president sees sluggish 18 months ahead

By WisBusiness.com Staff

MADISON — The president and CEO of Chicago’s Federal Reserve Bank on Thursday painted a gloomy economic picture for the next 18 months, saying Wisconsin, the Midwest and the nation will have “a lot to weather” especially on the manufacturing front.

Charles Evans told a business audience that the forecasts and economic statistics were “sobering,” comparing the current recession to the deep one of the early 1980s. Evans said the country is in for a “protracted period of poor economic performance” and said the Fed is using all its tools to mitigate the effects of a downturn.

While deflation is a concern with some now, the huge amount of liquidity poured into the financial system may someday pose the opposite problem — hyperinflation. “It’s what Milton Friedman taught, and I believe,” he said of the economists monetary theories.

“There’s a tremendous balancing act,” he added, noting the Fed’s balance sheet has tripled from roughly $800 billion to $2.5 trillion. But he said he didn’t “currently see much risk of an outright deflationary episode.”

Gov. Jim Doyle preceded Evans and touted the opportunities of a coming stimulus package that he said could help thaw an economic winter and usher in spring.

The fourth annual Wisconsin Economic Forecast Luncheon was presented by the Wisconsin Bankers Association and the Wisconsin Realtors Association, with support from several sponsors, including WisBusiness.com. The program drew a record crowd of more than 500, said organizers, owing robust attendance to two top speakers and the recession.

Evans predicted a slow recovery.

“Going forward, rising unemployment, low levels of consumer sentiment, losses in stock market wealth, declining home values, and restrictive credit conditions are likely to continue to weigh on household spending. Business expenditures are also likely to be held back by a weaker sales outlook and tighter credit conditions. Consequently, real GDP is likely to fall sharply in the first half of 2009,” he said.

“We expect GDP growth to slowly recover over the remainder of the year, reflecting the support from both traditional and nontraditional monetary policies, fiscal policy actions (many of which are yet to be enacted), and progress by the financial markets in working through their difficulties. I expect real GDP to decline for 2009 as a whole and to rise at a pace in the neighborhood of potential growth during 2010. However, this growth will not be strong enough to close the resource gaps emerging over this period. Indeed, the unemployment rate—the main resource gap measure in the labor market—is likely to rise into 2010.”

Next year’s event is set at the same location, the Monona Terrace Convention Center, for Jan. 14, 2010.

Read the prepared text of Evans’ Madison speech