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Fed Official: Economy Could Stabilize By Year End

President of the Federal Reserve Bank in Cleveland said Wednesday the economy will continue to weaken through the first half of 2009 before it gets better.

MAUMEE, Ohio (AP) -- The U.S. economy should stabilize by the end of the year and rebound in 2010 as long as weakening financial and economic conditions don't feed off one another, a federal reserve official said Wednesday.

Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said she thinks the economy will continue to weaken through the first half of the year and begin recovering next year, when federal stimulus plans increase spending and excess inventories are diminished.

But she also expressed concern that weakening financial and economic conditions could become mutually reinforcing.

"I have to warn you, however, that this outlook is subject to a number of downside risks," Pianalto said in a speech to business leaders in suburban Toledo.

Her expectation of a stabilizing economy by year's end was less optimistic than a month ago, when she said she anticipated a modest upturn in the second half.

Weakening employment, housing and business investment along with worsening conditions abroad have caused the economy to continue to contract in the past month, she said.

"These data confirm that we are still in the midst of a severe recession," she said.

Struggles in housing sales and construction continue, and it will take more time before the sector improves, she said.

The Commerce Department said Wednesday that new home sales were up in February but still far below last year's levels. The median sales price fell to $209,000, a record 18 percent drop from the same month last year.

President Barack Obama on Tuesday repeated his assertion that his housing bailout will help stabilize the housing market and help homeowners stay in their homes.

His budget forecasts that the recession will continue through this year but with a relatively shallow 1.2 percent decline in the gross domestic product. It predicts solid 3.2 percent growth for 2010.

Barriers to credit remain the biggest obstacle, Pianalto said. "Extending credit requires both capital and confidence, both of which are in short supply today," she said.

"It may be hard to envision a recovery taking hold," she said. "But the economy will recover."

The Fed's moves to stimulate the economy by expanding access to credit and the massive stimulus package will have significant effects on the economy, Pianalto said. "Our recovery depends on their success," she said.

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