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Federal Reserve chairman Ben Bernanke's pledge to stop the credit-market rout from wrecking the economy failed to quell concern at the Fed's Wyoming summer retreat that the United States is heading for recession.
"I came to Jackson Hole thinking there would be no recession, but I'm leaving thinking we could well have one," said Susan Wachter, a professor at the University of Pennsylvania's Wharton School, who co-wrote the first academic paper presented at the conference.
This year's theme - Bernanke said organisers had "outdone themselves" with a relevant topic - was housing and monetary policy, eliciting forecasts of sliding home prices and criticism the Fed should have done more. Martin Feldstein of Harvard University warned of a "very serious downturn" and called on policy makers to cut interest rates by 1 percentage point.
The normally academic tone of the Kansas City Fed's symposium was replaced this year by concern that the sudden increase in the cost of credit to people and companies will hurt spending and investment. Consumer confidence dropped by the most in two years last month, the Conference Board reported.
"There are no optimists in the crowd here," said Ethan Harris, chief US economist at Lehman Brothers Holdings in New York and a former head of domestic research at the New York Fed. "There's a pretty strong consensus that this has gotten a lot more serious."
As officials and professors debated lessons from the housing slump, New York Fed president Timothy Geithner and Governor Randall Kroszner were spotted on their mobile phones.
Geithner is the central bank's liaison to Wall Street, while Kroszner heads the Fed board's banking supervision committee.
"The economy could suffer a very serious downturn," Feldstein, president of the National Bureau of Economic Research in Cambridge, Massachusetts, told the conference.
The bureau dates American economic cycles. The last recession was from March to November 2001.
Bernanke said the Fed would "act as needed" to protect the expansion.
That didn't assuage critics such as Edward Leamer, the head of an economic forecasting group at the University of California at Los Angeles. He said the Fed merited an "F" for failing to prevent the housing bubble and then not reducing rates as it burst.
Feldstein called for "a major reduction now in the federal funds rate, possibly by as much as" 1 percentage point from the current level of 5.25 per cent. While that might push up inflation, he said, it was the lesser of two evils.
Fed policymakers next meet in two weeks. While central banks pumped US$350 billion ($497 billion) in emergency funds into money markets last month, signs of stress continue.
Commercial paper, a short-term financing tool, declined by US$244.1 billion, or 11 per cent, in the three weeks to August 29, the most in at least seven years, Fed data show. Three-month Treasury bill yields had their biggest drop since 2001 in August as investors sought safety in Government debt.
Bernanke said failures in subprime mortgages, the origin of the turmoil, were likely to climb further as variable-rate loans reset higher.
Even so, "global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans," he said. That was because of difficulties in setting prices for complex securities and concerns that housing will hold back economic growth.
"I rather expected that I would come out and find that people weren't quite as gloomy as I was, and I didn't find that," said former Fed Governor Lyle Gramley, now a senior economic adviser at Stanford Group in Washington. "So it confirmed my own concerns about the economy."
Pundits nevertheless sounded confident that the global economy, which has relied on the US to drive growth for much of the past decade, is strong enough to cope with the slowdown.
In China, where the economy expanded at the fastest pace in more than 12 years in the second quarter, manufacturing unexpectedly quickened last month. While business confidence fell in Germany, it was still better than most economists had forecast.
"The world economy is still very robust and growth is much more evenly spread than it was a few years ago," said Otmar Issing, former chief economist at the European Central Bank.
That was little comfort to most as they debated the impact of the housing recession on consumer spending.
-Bloomberg
