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U.S. economy on ‘knife edge’ of contraction: Fed economist

By Reuters
Tuesday, September 27, 2011 12:15 EDT
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SAN ANTONIO (Reuters) – The U.S. economy is on a ‘knife edge’ between growth and contraction and monetary policy tweaks do not seem to be helping, the Dallas Federal Reserve’s top economist said on Tuesday.

The U.S. jobs engine has lost momentum and could be set for further “backtracking,” Dallas Fed chief economist Harvey Rosenblum told a forum sponsored by the greater San Antonio Chamber of Commerce. Meanwhile, he said, there is also a “credible” risk of rising inflation.

“We are in the midst of the Second Great Contraction,” Rosenblum said, demonstrating the economy’s predicament with a picture of a place on the Appalachian Trail known as “Knife’s Edge.”

“Economic growth has slowed; it may have stalled,” he said. “The patient isn’t responding well to the medicine.”

The grim assessment of the economic outlook came a week after a majority of the Fed’s policy-setting panel backed further monetary policy easing to help support a faltering U.S. recovery.

Dallas Fed President Richard Fisher was one of three policymakers to dissent.

Fisher is due to explain the reasoning behind his objections in a speech in Dallas on Tuesday.

In San Antonio, Rosenblum said that there is a better than even chance the United States will return to more than 2 percent growth. But he said that if he had to guess whether the economy was more likely to get worse in the future than expected, or better, the answer would be worse.

(Reporting by Jim Forsyth in San Antonio; Writing by Ann Saphir in Dallas; Editing byJames Dalgleish)

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