Economic Growth Stalls, Amid Fed Worries about Deflation

With recovery losing steam, Fed official warns that low-interest policies are putting nation at risk.

A key economic report Friday is expected to show the U.S. recovery is losing pace, as a top Federal Reserve official warned of crippling "Japanese-style" stagnation.

The Commerce Department will give its first estimates of second quarter growth, with many experts expecting the figures to show further weakening amid sky-high high unemployment.

Analysts expect gross domestic product to have slowed to 2.5% in the period, down from 2.7% in the first three months of the year.

That bleak backdrop was further darkened July 29 when James Bullard -- a member of the Fed's interest rate-setting panel -- said the United States was closer to a Japanese-style lost decade "than at any time in recent history."

"Escape from such an outcome is problematic," he wrote in a Fed journal. "Hope is not a strategy."

Given any risk of an external shock that would spark falling prices -- squeezing firms and forcing ever-slower growth -- Bullard said the central bank should consider restarting crisis measures.

Since the beginning of the financial crisis in late 2007, the Fed and Treasury Department have purchased hundreds of billions of dollars of U.S. debt in the hope of boosting economic activity, part of a process known in economic jargon as "quantitative easing."

But with interest rates at historic lows, the Fed has few levers left to prime the economy. Bullard warned that the bank would find it difficult to bring interest rates back to normal levels to help exit the spiral.

Promising low interest rates "at zero for a long time is a double-edged sword," he said. "A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities."

Until recently, the central bank had been looking forward to unloading such investments and putting its balance sheet back in order.

But with the recovery teetering on the brink, it is being forced to consider stepping back into the breach.

Bullard's comments appeared to paint a darker picture of the economy than that presented by Federal Reserve chairman Ben Bernanke, who recently told lawmakers he was "prepared" to take further action but only if the recovery "seems to be faltering."

Copyright Agence France-Presse, 2010

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