Fed officials weigh in on economy's weakness

WASHINGTON — The U.S. economy's weakness will stretch well into next year, a Federal Reserve official warned Friday.

"We likely are in for a protracted period of poor economic performance," said Charles Evans, president of the Federal Reserve Bank of Chicago.

The economy lurched into reverse in the summer as worried consumers slashed spending. Many analysts believe the economy will continue to shrink through the rest of this year and into the next, more than meeting a classic definition of recession.

"The U.S. economy is now clearly in the midst of a substantial downturn," Evans said in a speech to economists in Indiana. "Given the magnitude of the problems that we face, we could see activity remaining quite sluggish through much of 2009."

A recovery is expected to take hold "more firmly" in 2010 and 2011, but "at this time, it is very difficult to judge how long the downturn might last and how deep it ultimately will be," he said.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, in separate remarks, sounded a bit more optimistic about the timing of a recovery.

"Looking ahead, many analysts expect the U.S. economy to regain positive momentum sometime in 2009," Lacker said in a speech in Maryland. "That strikes me as a reasonable expectation."

The Fed officials' remarks come just days after the Federal Reserve sharply downgraded projections for economic activity this year and next, which will drive unemployment higher. The nation's unemployment rate zoomed in October to 6.5 percent, a 14-year high.

A trio of crises — housing, credit and financial — have badly damaged the economy.

To ease some of the pain, the Federal Reserve on Oct. 29 slashed its key interest rate to 1 percent, a level seen only once before in the last half-century. Many economists predict the Fed will lower rates again at its last meeting of the year on Dec. 15-16.

Besides cutting rates, the Fed has taken a flurry of unprecedented actions to ease the financial crisis and break through a credit clog so that banks will lend money more freely. The government also is rolling out a $700 billion financial bailout package and taking other steps to restore financial stability.