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ECONOMY:
 

Fed official: 2008 similar to 1991 recession

Minneapolis Fed chief Stern says current economic conditions suggest the United States may have a ways to go to get out of slump.

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The Fed faces a cutting dilemma
As disappointing economic numbers rattle Wall Street and recession looms, the Fed may cut rates again to stave off a downturn.

NEW YORK (CNNMoney.com) -- The slumping U.S. economy is reminiscent of the aftermath of the 1991 recession, according to the head of the Minneapolis Federal Reserve.

In a speech given Friday morning in Minneapolis, Gary Stern, the regional Fed president, said the current excesses in residential construction, housing market decline, and credit crunch all resemble the "headwinds" environment that prevailed 17 years ago.

If that is the case, the economy may be in a slump for some time.

"While such an environment will not be permanent, it could well persist for an extended period," said Stern.

"If credit is in fact restricted by some institutions and in some markets, it will likely take time for potential borrowers to find alternatives and substitutes."

Some economists have suggested that further rate cuts are needed to boost the economy and end its current struggles. But Stern seemed to suggest that further rate cuts may not be prudent.

Stern said that the Fed's recent key interest rate cuts to 3%, down from 5.25% in September represented good policy decisions at the time. However, aware that rate cuts also tend to weaken the value of the dollar, he offered that the Fed needs to be cautious with its future policy.

"Given the consensus that in the long run price stability represents the most significant contribution monetary policy can make to attaining high employment, it is essential that we conduct policy with this objective in mind, and I have no doubt that we will."

Stern is an influential Fed official who sits on the rate-setting Federal Open Market Committee. To top of page

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