The Federal Reserve continues to have "ample scope" to widen its balance sheet further and has "considerable ammunition" to fight the financial crisis, according to Atlanta Fed President Dennis Lockhart in a speech on Monday.
The central banker said that although GDP may fall 4% to 6% in the first quarter of 2009, the Fed's zero interest policy will provide "considerable" macroeconomic stimulus to the economy which he expects to bounce back in the second half of this year.
Nevertheless, the United States is not yet out of the woods, he warned, saying that although financial conditions had improved in September to October, "financial conditions going into 2009 are still unsettled."
The comments are consistent with those made by other central bankers over the last several days.
On Friday, Richmond Fed President Jeffrey Lacker said it is reasonable to assume that the U.S. economy will improve in 2009, but the financial safety net needs to be rolled back.
On Tuesday, Fed Chairman Ben Bernanke will make an appearance at the London School of Economics, his first appearance since Dec. 4 when he mentioned that the Fed was considering purchasing securities to help bring down interest rates in the United States.
Since then, the Fed has cuts rates to zero and embarked on a massive quantitative easing policy, buying a wide range of mortgage-backed securities and agency debt.
The FOMC's next meeting will take place on Jan. 28.
By Erik Kevin Franco and edited by Nancy Girgis
©CEP News Ltd. 2009