Associated Press | November 10, 2009
By Jeannine Aversa

WASHINGTON (AP) -- Unemployment likely will remain high for the next several years because the economic recovery won't be strong enough to spur robust hiring, Federal Reserve officials warned Tuesday.

The cautionary note struck by the presidents of regional Fed banks were the first public remarks by Fed officials since the government reported last week that the nation's jobless rate bolted to 10.2 percent in October. It marked only the second time in the post-World War II period that the rate surpassed 10 percent.

In separate speeches, Janet Yellen, president of the Federal Reserve Bank of San Francisco, and Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, warned that rising unemployment could crimp consumers, restraining the recovery. Consumer spending accounts for about 70 percent of economic activity.

"With such a slow rebound, unemployment could well stay high for several years to come," Yellen said. "In other words, our recovery is likely to feel like something well short of good times."

Yellen envisions the shape of the recovery kind of like an "L" with a gradual upward tilt of the base.

Lockhart said "very slow net job gains" may occur "sometime next year."

Troubles in the commercial real estate market and the plight of small businesses also will weigh on the recovery, they said.

Small businesses -- which held up reasonably well in the 2001 recession -- have been clobbered by the downturn, accounting for about 45 percent of net job losses through the end of 2008, Lockhart said. During the last two economic recoveries, small businesses contributed about one-third of net job growth. Lockhart said he doubted that would be the case this time.

That's because many small businesses rely on smaller banks for credit. But troubled commercial real estate loans are concentrated at those banks, hobbling the flow of credit. Lockhart said he is "particularly concerned" about that linkage.

Meanwhile, Eric Rosengren, president of the Federal Reserve Bank of Boston, weighed in on a different hot-button issue for Congress: how best to handle huge financial companies whose failure could endanger the economy.

Rosengren endorsed "living wills" that outline wind-down arrangements in the event of failure, rather than having the government restrict the size or activities of financial firms. "I am skeptical such dramatic action would significantly limit systemic risk," he said in a speech in London.

The Obama administration has called on Congress to set up a mechanism to safely dismantle failed financial companies -- along the lines of what the Federal Deposit Insurance Corp. does for collapsed banks. Although key legislative proposals revamping the nation's financial rules contain such a provision, some lawmakers and others have expressed interest in limiting the size of colossal firms or breaking them up if they get too big.

Richard Fisher, president of the Federal Reserve Bank of Dallas, told an Austin audience Tuesday evening that consumer spending is growing, but that he doubts it will recover its pre-recession vigor "for some time to come." He also said there is no imminent willingness by businesses to rehire or expand capital expenditures during the recovery.

"It may be some time before significant job growth occurs and even longer before we see meaningful declines in the unemployment rate," Fisher said in prepared remarks.

Fisher said he believes inflation is likely to remain subdued and that the Federal Reserve's current monetary policy is appropriate.

"It will take some time, in my opinion, to get back on a steady pathway to a pace of growth that will result in significant job creation. We are in for a long slog," he said.

Associated Press Writer Kelley Shannon in Austin, Texas contributed to this story.