U.S. growth could be weak for years

By Ros Krasny

HOUGHTON, Michigan (Reuters) - U.S. economic growth could be restrained for a few years by contagion from unprecedented problems in financial markets, a top Federal Reserve policy-maker said on Thursday.

"We should anticipate further declines in employment and softness in most components of demand for goods and services," said Gary Stern, president of the Minneapolis Federal Reserve Bank and a voting member of the U.S. central bank's monetary policy-setting Federal Open Market Committee this year.

In a speech at Michigan Tech University, Stern said fixing the financial system was more important than assigning blame at this point, given the "contagion effect" between the financial system and the broader economy.

"It's that process, that spillover effect, that's my concern," he said. "The real economy is adversely affected. Jobs and living standards are affected."

In recent months Stern has repeatedly compared the current downturn to the early 1990s recession, but on Thursday said the outcome could be worse.

"In view of the scope and severity of the recent financial shock, the restraint on economic activity stemming from credit market headwinds could exceed the experience of the 1990s."

He termed the 1990-1991 recession "brief but not especially mild."

Stern did not indicate whether he favoured another big cut to the federal funds rate at the FOMC's next scheduled meeting on October 28-29. Financial markets currently see a cut of either one-quarter or one-half percentage point from the current 1.5 percent level of the benchmark overnight lending rate.