Gary Stern: I think the banks that are going to pay back the TARP loans are in a good position to do so. They have been able to raise capital in the private markets. In addition many of the credit markets are functioning a good deal better than they were just a few months ago. Overall I think it is fair to say we've seen some significant improvement in many financial conditions. Although there still are some significant strains as well.

Gharib: So Mr. Stern, did TARP work? Did it do what it's supposed to do?

Stern: I think it did. I think the TARP program obviously helped to buy some time for financial conditions to strengthen and then I think the stress tests came along and that turned out to be very helpful in terms of reducing the uncertainty associated with the condition of many of these large institutions. And I think it was very important to reduce that uncertainty and re-establish some confidence.

Gharib: We've seen banks raise an enormous amount of money in the last few weeks. So if I wanted a mortgage or a small business loan is it easier now?

Stern: I think there is no question about that. I think it's always been true that high quality borrowers could get credit. They may have to shop around a little bit more than formerly. But I do think conditions have improved. Markets are starting to function better. Institutions are healthier and credit is more available.

Gharib: But even though you say all that, many people are concerned that with banks repaying this bailout money, that this could hurt the prospects for an economic recovery. What are your thoughts on that?

Stern: Well, you know, obviously the outlook remains uncertain as it for some time. But I don't think we are very far away from at least the initial stages of the recovery, because we are seeing some stabilization of some important components of spending, and because we have seen improvement in the credit markets, and because the inventory situation has improved a good deal.

Gharib: So how close are we to getting to the recovery phase?

Stern: I think in terms of the resumption of economic growth in the US economy, we're probably very close - not many months away from a resumption of economic growth. And that has been my view for some time. In terms of more rapid growth, and regaining previous peaks in economic activity, that's obviously going to take longer. In part because this was a significant economic downturn, and in part because there are still strains in financial markets and there have been declines in house prices and equity values, which do weigh on household balance sheets.

Gharib: And it's also hard to see a recovery as long as people are still losing jobs - no one's really doing any hiring. What's the timetable for a job market recovery?

Stern: Well, the job market recovery is likely to take longer than a resumption of economic growth for at least a couple of reasons. First of all, there's precedent for that if you look at the two previous expansions that began in 1991 and in late 2001, it took awhile for employment to increase. Secondly, we know that there are still industries that are contracting in our economy. So even if employment picks up in parts of the economy, it's going to decline in others, and you kind of have a race between what's going up and what's going down, and the declines may continue to win for a time.

Gharib: So, we've seen in past situations a jobless recovery -- where employers are still laying off workers, even though the economy picks up. Is that what we're in for this time?

Stern: Well, I would think that there's a reasonable probability, yes, that we'll see some of that this time as well. It's important to bear in mind though, that even when recoveries have started out in the so-called jobless frame as you referred to it, eventually we got very sizable expansions in employment, both in the expansion of the 1980's, in the 1990's and the expansion we had earlier this decade as well.

Gharib: But Mr. Stern, where is growth going to come from anyway? We're seeing that consumers are saving more, spending less and businesses aren't spending much either.

Stern: Well, I think it's going to come from three places in all likelihood. One, we are seeing stability in consumer spending. And I think we're not very far from seeing at least some modest gains there. As incomes go up, and we do have a large fiscal stimulus package in place as well as accommodative monetary policy I think it's fair to say. I think we are seeing some signs of stability in terms of housing sales both new and existing and that's constructive. And then we have the inventory cycle where we have worked our way through, a lot of the excess inventories that have plagued the economy. And as inventories decline, at some point businesses will have to step up production just to meet existing levels of demand. And so that will help as well.

Gharib: Now the Fed has done a lot to revive the economy. What more can it do?

Stern: I'm not sure we have a lot more to do because as I suggested, I don't think we're too far away from at least the first stages of the expansion. Obviously we can increase the volume of some of our activities if we do need to do more. But I think that simply remains to be seen if that's going to be appropriate at this point.

Gharib: Do you think a second stimulus package is needed?

Stern: No. In my judgment at the moment, that is not needed. I think a little patience would be of value here. This has been a deep recession there's no question about it. But I do... the U.S. economy is very resilient at its core, it's fundamentally very flexible. I think we should let those virtues show through.

Gharib: Now, as you look at all the economic data that's coming in, are you more or less concerned about inflation risks?

Stern:I'm not terribly concerned about near-term inflation risks. The inflation numbers for the most part have come in largely as I anticipated. I do think looking forward, but looking at this a ways down the road, policy will have to be adjusted, not just Federal Reserve policy, but budget policy as well, will have to be adjusted to assure price stability in the long run, but I don't think we're at that juncture yet.

Gharib: But you said earlier when we were talking that you see recovery just very near by in the coming months. If that's the case, won't the Fed have to begin raising interest rates and shifting its monetary policy?

Stern: Well, I don't think we have to shift policy at the first signs of recovery or even once it becomes apparent to the naked eye. But I do think that we will have to do that in a timely way and I would point out that if you look at the economic history of the United States over the past 25 years or so, we have for the most part, had modest to declining low inflation. So it's not an objective that cannot be obtained and it is one that with appropriate policy, in my judgment, will be..

Gharib: Mr. Stern, I'm sure you've heard this a lot. People are concerned about the deep involvement of the Fed and the government in running banks and businesses. What's the Fed's exit strategy.

Stern: Well, of course, with regards to some of the specific programs, as market conditions improve, volumes in those programs and our exit will occur automatically because we won't be the low-cost source of funds. We can certainly shrink our balance sheet when appropriate by selling off some of the assets that we've acquired. But I do think that it's going to be a difficult exit strategy to get the government.... to reduce government involvement in a credible way so that private sector participants don't expect government protection the first time a problem arises, say in a few years down the road. That is going to be a major challenge. That's going to take work beginning almost immediately. I think it's something we can accomplish but it's going to take a different mindset.

Gharib: Mr. Stern, thank you so much for coming on the program. We really appreciate your time.

Stern: My pleasure.