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Fed's Fisher Warns Of Continuing Contraction And Higher Unemployment

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More economic woes are ahead for the U.S. as Gross Domestic Product is likely to contract between 4 and 5 percent in the fourth quarter 2008 and remain a negative number in the first half of 2009, a top fed official warned Thursday. In addition, the unemployment rate - already at 6.7 percent - could shoot past 8 percent as the recession drags on.

Speaking at the World Affairs Council of Dallas/Fort Worth and the Dallas Committee on Foreign Relations, Dallas Federal Reserve Bank President Richard Fisher offered a bleak economic outlook. However, he expressed faith in the dramatic actions taken by the Federal Reserve to prop up lending in the midst of the financial crisis.

"By my estimate, (GDP) is on pace to contract another annualized 4 to 5 percent in the current quarter with further contraction likely through at least the first half of next year," Fisher said in prepared remarks.

"Industrial production is falling sharply; consumption is cascading downhill; demand has evaporated as businesses and consumers alike pull in their horns and de-lever from excess indebtedness that fueled the prior boom," he added. "Unemployment has increased to 6.7 percent at the last reading and appears to me to be headed in the direction of, and possibly past, 8 percent."

Fisher looked to the outcome of Tuesday's FOMC meeting as an indication that the Federal Reserve will continue to pull out all the stops in order to help shake the vicious cycle that has gripped the economy.

Tuesday, in an unprecedented move, the Federal Reserve established a target range for the federal funds rate from zero to one-quarter percent, slashing the rate from its previous rate of 1% and bringing it to its lowest level in over 50 years. The move comes as U.S. policymakers face the most severe economic crisis since the Great Depression.

Along with the rate cut, Federal Reserve also pledged to purchased agency and mortgage-backed securities. It also added that the funds rate is likely to remain exceptionally low for some time.

The federal funds rate has been cut over 500 basis points since August of 2007, when the collapse of the housing and subprime mortgage markets touched off a ripple effect that has thrust the economy into its worst financial crisis since the Great Depression.

As the unemployment rate climbs and nervous Americans cut back on spending, a vicious cycle is taking hold that the Federal Reserve is working to shake.

In his remarks Fisher cited the bevy of lending facilities that the Federal Reserve has established in order to release the economy from the grip of the financial crisis. He noted that the Federal Reserve has "made clear" that they will "not shy from pursuing every practicable means of supporting the functioning of financial markets and stimulating the economy back to a steady state by employing new techniques that fit the current circumstance."

If the Federal Reserve is successful with their efforts, he noted that "issuers of corporate debt should see the cost of debt reduced over time." He cited some evidence including the fact that credit-default swaps index has fallen 16 percent over the past three days, that the Fed's efforts are working.

However, Fisher said that there is still much work to be done.
"Yet despite these accomplishments, we have miles to go before we sleep," he said.

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