Coralville Event Features Chicago Federal Reserve CEO

Expect recovery to be sluggish, bank chief says

By B.A. Morelli Iowa City Press-Citizen

The economic recession in the "technical sense" is over, but recovery itself will be sluggish, the chief executive of the Federal Reserve Bank in Chicago said during a mid January event in Coralville.

"In a narrow, technical sense, the short answer is yes," Reserve president and chief executive Charles Evans said in a speech about whether the recession is over. "Many broad indicators of economic activity are increasing as we would expect in the early stages of recovery.

"Nonetheless, I keep hearing the question because for many households and businesses it doesn't feel like much of a recovery," he said.

Evans made his remarks at a business luncheon at the Marriott Hotel and Convention Center in Coralville.

Gross domestic product increased 2.25 percent in the third quarter and accelerated in the fourth quarter, auto sales continue to increase and the housing market is becoming active again, he said. However, job growth and consumer spending will see a slower, more gradual recovery, he said.

"Employment is often the last piece of the puzzle to fall into place during a recovery. This will certainly be the true test of time," Evans said in the speech.

Before his speech, Evans spent part of the morning Wednesday fielding questions from students in a University of Iowa Tippie College of Business MBA class.  One concern from the recent economic crisis from the regulatory standpoint is the notion of a bank "too big to fail," he said.

One possible strategy to deal with such banks is to discourage them from growing so large by requiring them to hold more capital, for example, Evans said.  "We will have utterly failed to address the task at hand if we don't address the 'too big to fail' banks,'" Evans told the class.

Another area of need is connecting risks to rewards by doing a better job embedding risk in pricing, particularly for a bank's debt, Evans said. Leading up to the economic crisis, risk pricing wasn't appropriate for many of the banks' debt holders, he said.  "Creditors, if they think they are bulletproof, the pricing isn't going to be right and it's going to transfer to lending institutions themselves," he said.

During the recovery, officials will be inclined to over-regulate, which is a concern, he said. It will be important for businesses to have access to credit so they can expand and hire, he said.

"An obvious concern is over-adjustment of the pendulum," he said.