Regions Central Virginia

Fed governor expects gradual improvement in economy

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A member of the Federal Reserve Board of Governors expects the U.S. economy to improve gradually in 2012 after gaining some momentum late last year.

Elizabeth A. Duke, a former Virginia banking official, predicted in Richmond Friday that unemployment will “gradually (and perhaps fitfully) move lower” and inflation will settle down.

A potential risk to the recovery, however, is fallout from the European debt crisis. A deep recession in Europe would hurt U.S. trade and put strain on American financial markets, she said.

Speaking at the “2012 Financial Forecast” sponsored by the Virginia Bankers Association and the Virginia Chamber of Commerce, Duke noted that the national jobless rate had dropped from 8.7 percent in November to 8.5 percent in December, “a rate that while still far too high was the lowest rate in two and a half years.”

While Duke expects economic activity to gradually increase in the next year or so, “I recognize that some of the factors holding back the pace of activity are likely to persist.

She mentioned, for example, the effects of sluggish employment growth on consumer spending.

She also noted that the housing market has shown little improvement since and the 2007-09 recession despite “record affordability” as a result of interest rates and home prices.

Nonetheless, she said, with the exception of mortgages, credit conditions for businesses and consumers are beginning to improve, and most banks are ready to make loans to improve their profitability. Household debt also has dropped sharply since 2007.

Duke noted that while business spending has helped propel the slow recovery, the pace has been modest. “As businesses become more certain of the durability of the recovery, I expect that they will become more willing to further expand productive capacity, particularly with new business equipment and software,” she said.

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