September 27, 2011 / 2:59 PM / in 7 years

U.S. on "knife edge" of contraction: Fed economist

SAN ANTONIO (Reuters) - The U.S. economy is on a “knife edge” between growth and contraction, and if it were a dashboard, it would be flashing “watch out, danger ahead on all gauges,” Dallas Federal Reserve Bank’s top economist said on Tuesday.

“The economy is moving along at stall speed,” Dallas Fed research director Harvey Rosenblum told a forum sponsored by the greater San Antonio Chamber of Commerce. “Unless we start moving a little bit faster, we are at a tipping point where things may not go the right way.”

The U.S. jobs engine has lost momentum and could be set for further “backtracking,” Meanwhile, he said, there is also a “credible” risk of rising inflation.

“We are in the midst of the Second Great Contraction,” Rosenblum said, demonstrating the economy’s predicament with a picture of a place on the Appalachian Trail known as “Knife’s Edge.”

“This patient is still not ready to get out of the hospital, there are still tubes connected to the patient, and the patient is still not responding well to all the medicine.”

The grim assessment of the economic outlook came a week after a majority of the Fed’s policy-setting panel backed further monetary policy easing to help support a faltering U.S. recovery.

Dallas Fed President Richard Fisher, Rosenblum’s boss, was one of three policymakers to dissent. Fisher gave a vigorous defense of his decision at his bank headquarters on Tuesday, saying he believed the move could do more harm than good.

In San Antonio, Rosenblum said that there is a better than even chance the United States will return to more than 2 percent growth, rather than fall into recession.

But at the recent policy-setting Federal Open Market Committee meeting, given a choice between whether the economy will be better than expected or worse than expected in the near future, most participants said it would be worse than expected, according to Rosenblum.

“The takeaway on the national economy is that economic growth has slowed and maybe stalled,” he said. “We are on an edge.”

Reporting by Jim Forsyth in San Antonio; Writing by Ann Saphir in Dallas; Editing by James Dalgleish

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