NEW YORK (Reuters) - The U.S. recession looks to be longer and more severe than originally thought, but there are signs that the economy will improve in the second half of 2009, a top Federal Reserve official said on Thursday.
"It appears the economy contracted quite significantly in the final quarter of 2008, and may continue contracting over the first half of 2009. We are seeing businesses retrenching and unemployment rising," Boston Federal Reserve Bank President Eric Rosengren said in remarks prepared for delivery to the Massachusetts Mortgage Bankers Association's Annual Meeting in West Newton, Massachusetts.
"As a result, this recession looks to be longer and more severe than originally thought. Still, there are indications that the second half of the year will show improvement."
Lower energy prices and concerted monetary and fiscal policy efforts should sow the seeds for a recovery later in 2009, he said.
"Energy prices have fallen dramatically, making it much less expensive to drive cars or heat homes," he said, "Fiscal stimulus packages being discussed in Washington could provide an economic boost. And monetary policy is also contributing."
The Federal Reserve last month cut its benchmark fed funds rate to a zero to 0.25 percent range after an aggressive rate cutting cycle and has rolled out a raft of unprecedented liquidity programs to support key credit markets in its battle against the worst financial crisis in 80 years.
"While all these developments will take time to fully impact the economy, they should be sowing the seeds of a recovery later in 2009," he said.
Rosengren said recent actions by the Fed to reduce mortgage rates and support short-term credit markets, such as its agency mortgage-backed security and agency debt purchases were having an impact.
"By supporting short-term credit markets, the Federal Reserve is signaling its determination to take appropriate actions to prevent seize-ups in financial markets, reducing the risk premium," Rosengren said.
"We have seen improvements of late in the functioning of many short-term credit markets and I expect this improvement will continue."
Rosengren, who won't assume a voting seat on the Fed's policy-setting committee until 2010, also said that with appropriate steps, the housing market could stabilize this year. A recovery in the housing market is widely seen as a prerequisite for economic recovery.
"The recent reductions in mortgage rates, in part due to monetary policy actions, have enabled more borrowers than would otherwise have done so to purchase or refinance homes," Rosengren said.
"Expansion of this effort and encouraging greater GSE participation, should encourage borrowers that have equity and reasonable credit scores to purchase or refinance homes," he said.
For more troubled borrowers, Rosengren said, Federal Housing Administration (FHA) lending programs could be appropriate.
Rosengren added that once the market has stabilized, mortgage securitization should be structured in such a way to reduce the likelihood of future upheaval in mortgage finance.
"And more generally, financial regulatory reform will also be a key policy topic this year," Rosengren said.
(Reporting by Kristina Cooke)