Toward a Durable Recovery

The country is suffering from a severe financial crisis that has accelerated an economic downturn during the second half of 2008. Policymakers have responded with programs that should remediate the many pressing economic challenges we face moving into 2009, and some hopeful signs have emerged in credit markets that a corrective process is under way.

As term funding shows sustained improvement and other indicators point to the credit market's gradual return to health, I expect severe economic weakness in the short term should give way to an eventual recovery of growth near potential, with inflation returning to an acceptable range.

Let me begin with a summary of the economic situation according to the most recent data. Economic activity as measured by real gross domestic product (GDP) declined an estimated 0.5 percent at an annualized rate in the third quarter, according to the preliminary estimate. An even steeper decline in GDP is likely for the fourth quarter. …

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