Bankers group sees U.S. recession ending in third quarter

The U.S. recession will end in the third quarter, but lingering high unemployment and large federal deficits may pose a longer-term threat, economists advising the American Bankers Association said on Tuesday.

The economists expect the U.S. Federal Reserve would keep interest rates near zero percent until the third quarter of 2010 because a sluggish recovery would keep inflation in check.

They forecast that 2009 real gross domestic product would fall 1.3 percent, with 2010 growth rebounding to 3 percent.

However, they thought unemployment would not peak until the first quarter of 2010, and it may be several years before the economy returns to full employment, which they pegged at 5 percent.

The economy will return to growth but not to health, said Bruce Kasman, chairman of the economic advisory committee and chief economist for JPMorgan Chase in New York. Growth in the coming quarters is likely to gather momentum but will not prove sufficiently robust to undo much of the severe damaged to our labor markets and public finances.

The economic advisory committee of the ABA meets semiannually to make their forecast after meeting with the Federal Reserve's Board of Governors. Tuesday's forecast was similar to the consensus forecast in the Blue Chip survey of economists, which was released last week.

Kasman said the committee was largely in agreement on the broad contours of the economic growth forecast, but there was less agreement on the path of inflation and how soon the Federal Reserve would begin hiking interest rates.

Some thought there was sufficient slack in the economy to keep price pressures down, but longer term there was growing concern among some committee members that large federal deficits and a slower pace of economic growth could pose an inflationary threat.

The Federal Reserve wraps up its next policy-setting meeting on June 25, and is widely expected to keep interest rates unchanged near zero percent. However, there is much debate among economists about whether the Fed will announce plans to buy more assets such as Treasury debt to help keep borrowing costs low.

(Reporting by Wendell Marsh; Editing by Leslie Adler)