"As a result, this recession looks to be longer and more severe than originally forecast. Still, there are indications that the second half of the year will show improvement," he said.
Lower energy prices and concerted monetary and fiscal policy efforts should set the stage for a recovery later in 2009, he said.
"Energy prices have fallen dramatically, making it much less expensive to drive cars or heat homes," he said, "Fiscal stimulus packages being discussed in Washington could provide an economic boost. And monetary policy is also contributing," he added.
The Federal Reserve last month cut its benchmark fed funds rate to a range of zero to 0.25 percent after an aggressive rate cutting cycle and has rolled out a raft of unprecedented liquidity programs to support key credit markets in its effort to battle the worst financial crisis in 80 years.
"While all these developments will take time to fully impact the economy, they should be sowing the seeds of a recovery later in 2009," he said.
A lot of us are banking on the fiscal program to really help ameliorate the damage in the second half of next year. The Fed president also makes a strong case about lower energy prices having a net positive effect. Then there is the issue of monetary policy. In general it takes 12-18 months for interest rates to move through the economy. Assuming we are still in a time when that is an appropriate analysis (and we may not be), the impact of lower rates will be hitting the economy all next year. Assuming all of this to be accurate and the second half of next year will be OK but not great. This is the scenario that I think is most likely, but there are a lot of ifs that have to happen for that work.