–Banking Sector Difficulties Impeding Labor Market Recovery
–Modest Impact on US Recovery if Europe Enters Recession

By Brai Odion-Esene

WASHINGTON (MNI) – While bullish on the prospects for growth and
inflation in the United States, Minneapolis Federal Reserve President
Narayana Kocherlakota warned Friday that the difficulties in the banking
sector are likely to continue over the next year or two and slow the
recovery in the jobs market.

The struggles of the banking sector are feeding into the sluggish
labor market by delaying the ability of small businesses to create jobs,
he said.

In remarks prepared for delivery to the Metropolitan Economic
Development Association’s 39th Annual Recognition Luncheon in
Minneapolis, Kocherlakota said he is optimistic in his forecast for the
overall U.S. economy, especially its growth prospects and the impact of
inflation.

“However, that optimism is tempered by my concerns about continued
weakness in labor markets,” Kocherlakota said.

He said he expects GDP growth to be near 3% in the current quarter,
and to average close to 3.5% over the next two years: “The recovery is
well under way.”

He is also positive on inflation, and annualized PCE inflation
should remain at about 1.5% during the rest of this year.

“On the other hand, I am concerned about the ongoing lack of
vitality in the American labor market,” he said, noting that recovery
seems likely to be even slower compared to past recessions, “because of
weakness in the banking sector.”

Bank lending continues to be subdued, partly because of low loan
demand and also due ongoing difficulties in the banking industry,
Kocherlakota said.

Some banks have asset quality problems, while most face significant
uncertainty about the ultimate impact of proposed regulatory changes.

“These difficulties in the banking sector are likely to persist for
the next year or even two,” he said. And as a result, “the challenges
for banks translate into difficulties for small businesses in obtaining
requisite credit and into slower job creation for our country.”

Kocherlakota added that, “With all of these factors in play, I
would be surprised if the national unemployment rate were to fall below
9% before the end of 2010 or below 8% by the end of 2011.”

As for the turmoil across the Atlantic, the Fed official said the
U.S. can only be affected if demand for its goods fall or if banks some
amount of credit risk and exchange rate risk due to their holdings of
European securities.

“Fortunately, both of these channels are small — for example, we
export less than 2% of our total GDP to the European Union. For this
reason, I believe that a European downturn would have only a modest
impact on the pace of our recovery,” he said.

Kocherlakota said the problems in the labor market “are short-term
ones,” and voiced his confidence in the “resilience” of American
entrepreneurs and their ability to create jobs.

** Market News International Washington Bureau: 202-371-2121 **

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