(RTTNews) - Minneapolis Federal Reserve President Gary Stern spoke at the Capital City Partnership Annual Meeting in St. Paul, Minnesota on Thursday, offering a sliver of hope that actions by the Federal Reserve could help stabilize the financial markets.

Although the economy is likely to remain in recession for at least two more quarters, Stern predicted that healthy growth would return by the middle of 2010.

“In view of the state of the credit markets and of the housing sector, it seems a fair bet that it will take time for momentum to build,” he said in prepared remarks. “But with the passage of time - as we get into the middle of 2010 and beyond - I would expect to see a resumption of healthy growth.”

While he noted that it “remains unclear” if additional steps will be needed, Stern stated he is “guardedly optimistic” that the correct actions have been taken to boost liquidity in financial markets.

Although funding is more readily available than at the height of the credit crisis, there are still serious issues with the credit markets.

“Overall, it seems to me that these credit strains are real and pervasive, and that these conditions are likely to weigh on economic activity for some time,” the Minneapolis Fed president said. “As it is, the economy is in the midst of a serious recession that seems likely to persist for at least another two quarters.”

Record low interest rates and the promise of a major fiscal stimulus package will likely boost the economy, “unless consumers and businesses turn exceedingly cautious,” Stern said.

The economic crisis has sparked a series of unprecedented actions by the Federal Reserve, including the establishment of a bevy of lending facilities, a federal funds target range between 0 and 0.25 percent, and a balance sheet that has rapidly expanded from $900 billion in September 2008 to $2.2 trillion at the end of the year.

Once economic growth is back on the right path, banking issues and policies will be a central issue for the Fed, Stern said, adding, “Getting these right is both critical and challenging.”

“I have cautioned about placing an excessive burden on traditional bank supervision and regulation, although clearly such policies have a valuable role to play,” he continued.

Addressing issues like the Too Big to Fail problem will be essential moving forward, Stern stressed.

In terms of the Fed’s commitment to prices stability, Stern noted the two major concerns of FOMC members: concerns that the liquidity injected in the market today could lead to inflation down the road and a concern that deflation could take hold as global economic activity continues to decline.

Although he would not dismiss either concern, Stern did note that the threat of deflation should “diminish commensurately” should economic growth return to the U.S.

With regard to inflation concerns, Stern noted that there is “ample time to withdraw excess liquidity as appropriate, and in this regard the Federal Reserve remains firmly committed to long-run price stability.”

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Posted in Categories: Economy, Releases, USA.

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