support the broader economy. finally, the treasury recently announced a program to assist banks and other lenders in finding markets for their " legacy assets " – that is, real estate - related assets that were accumulated during the housing boom and have since declined in value and become relatively illiquid. uncertainty about the value of legacy assets is weighing on confidence in banks, and so helping banks to dispose of such assets should contribute to their ability to raise capital and increase lending. employing its fiscal policy tools, the government has enacted a multifaceted program of stimulus that will provide direct support to spending and economic activity. in february, the president signed into law a $ 787 billion package that included cuts in taxes and increases in transfer payments for households, lower taxes for businesses, higher spending for infrastructure investments, and additional financial assistance to state and local governments, many of which would otherwise have been forced to cut spending in response to declining revenues. although the exact effects of these measures on the economy are difficult to gauge, they will likely provide a significant boost to activity. according to the congressional budget office, the effect of the stimulus package on the level of real gdp at the end of 2010 could range from about 1 percent to more than 3 percent, relative to a baseline forecast that does not include the stimulus. that additional gdp translates into an unemployment rate by the end of next year that is between 1 / 2 and 2 percentage points lower than it otherwise would be. with the tax cuts already showing up in paychecks, increases in transfer payments already in place, and grants to states and localities starting to flow, the effects of the package on aggregate demand should start to provide some support to activity fairly quickly. thus a broad range of policies are in place to foster recovery. but economic recoveries are also typically shaped by powerful internal cyclical dynamics. indeed, it appears that some of the forces that had been holding down growth are starting to abate. in particular, the recent data suggest that the multiyear contraction in home sales and new construction may be nearing an end. house prices could well continue to fall for a while, and months'supply of unsold homes will likely remain elevated for some time. at some point, however, house prices will begin to flatten out, and fears about buying into a falling market will start to wane. at the same time, the improved affordability of homeownership resulting from reduced house prices, low mortgage interest rates, and government programs ( including incentives

donald l kohn : the economic outlook speech by mr donald l kohn, vice chairman of the board of governors of the us federal reserve system, at the hutchinson lecture, newark, delaware, 20 april 2009. * * * i'm pleased to be here and honored to be invited to deliver the hutchinson lecture. although i never met harry hutchinson, i very much wish i had. like harry, i received a ph. d. in economics from the university of michigan, and my professional interests have centered on money and banking. given harry's expertise and his keen interest in teaching, i'm sure he would have had valuable insights about the recent financial turmoil to share with all of us. in this talk, i will focus on the economic outlook, which, of course, has been significantly influenced by that turmoil. after a brief review of recent developments, i will discuss the factors that are likely to support a resumption of economic growth over coming quarters as well as the likely contour of that recovery. 1 recent developments the u. s. economy and financial markets have been through an extraordinarily difficult period. the downturn in economic activity that has been under way since late 2007 steepened considerably last fall as the strains in financial markets intensified, credit conditions tightened further, and asset values continued to slump. partly in response to the financial turmoil, consumer and business confidence plummeted, and nearly all major sectors of the economy registered steep declines in activity. in all, real gross domestic product ( gdp ) dropped at an annual rate of 6 - 1 / 4 percent in the fourth quarter of 2008 ; the commerce department's advance estimate for the first quarter of 2009 – which will be released next week – is expected to show another sizable decrease. this recession seems likely to be among the deepest and longest in the post - world war ii period. labor market and production data continued to deteriorate through the first quarter. businesses shed more than 650, 000 jobs in march, the fifth consecutive month of job losses in the neighborhood of 600, 000 or more, and the unemployment rate jumped to 8 - 1 / 2 percent. moreover, the number of new claims for unemployment insurance benefits remained elevated in early april, which suggests that job losses have remained appreciable. and in the industrial sector, another large drop in output was recorded in march as manufacturers continued to cut production in response to weak demand and excess inventories. the recent spending indicators, however, have been