WASHINGTON (AFX) - Federal Reserve Bank of Richmond president Al Broaddus said it is "far from clear" that the U.S. economy is bottoming out, adding that with "still considerable downside risks in the outlook," continued weakening will require additional monetary stimulus.
"It's far from clear at this point that the economy is bottoming out, and if it continues to weaken, additional stimulus may well be needed," Broaddus said in remarks to a money managers conference here. He explained that the near term prospects for the economy "will depend to a considerable degree on how quickly the factory sector can work through its inventory and capacity imbalances."
He said that while the inventory correction in the auto sector "appears to be progressing well," there is still a significant overhang in computer equipment inventories, "despite aggressive pricing." Broaddus said that years of sharply increased spending on high tech equipment has generated "considerable excess productive capacity," which "will take time to work (down)."
"Investment in equipment may remain weak for some time, even though longer term prospects remain good," he concluded.
On the positive side, Broaddus said that the rise in U.S. equities in recent weeks has generated a boost to consumer confidence, which could help support consumer spending.
"The stock market recovery is apparently boosting consumer confidence ... if the market recovery persists, confidence could continue to rise.
"That, of course, would undergird consumer spending," he said. Broaddus said that while a recent rise in long term interest rates "could indicate a modest increase in inflation expectations," he concluded that "there is relatively little risk at present of a resurgence of either inflation or inflation expectations."
"I see little risk of a near term inflation breakout," he added. Broaddus said that the Federal Reserve has now implemented a "forceful" easing of monetary policy which should help to "contain the softening in the economy," concluding that "we may well begin to see the effects of these actions in the not-too-distant future."
Broaddus is currently a non-voting member of the Fed's Federal Open Market Committee (FOMC), which determines overnight bank lending rates.