WASHINGTON -- Federal Reserve Governor Susan Phillips said that while a setback in the economic recovery is still possible, "there are clearly reasons to be optimistic and encouraged."

Mr. Phillips, speaking at a meeting of the Savings and Community Bankers of America, said that economic data should become increasingly more positive as the year progresses.

She cited an improving financial sector, better productivity, and low inflation as reasons to be optimistic. She also expects to see further gradual reductions in the core rate of inflation.

Willingness to Lend

The so-called credit crunch may be starting to ease, Ms. Phillips told the thrift group, because lenders appear to be more willing to make loans.

With lower interest rates and other improving economic conditions, the financial sector is in a condition to finance the budding recovery, Ms. Phillips added.

She also said employment prospects appear to be improving, but not fast enough to bring the unemployment rate down.

Talking to reporters following her speech, Ms. Phillips said the unemployment situation is "a mixed bag." "It may be a few more months" before the jobless rate comes down, "but the positive sign is people are looking for work."

Public Still Wary

Ms. Phillips said some problems continue to create a drag on the level of U.S. growth. Though consumer confidence has been improving, the public appears to be apprehensive about the future.

She said consumers are still working off debts accumulated in the 1980s, but she expects to see some pickup in spending in coming months.

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