Jeff Lacker, the president of the Federal Reserve Bank of Richmond, pointed to the financial services sector Wednesday as a sign that the economic outlook is improving.

"Many major banks have sold stock successfully and now have the capital to support new lending, even if conditions turn out worse than expected," he told the Chamber of Commerce in Danville, Va. "Although many borrowers face tougher credit terms in a soft economy, the banking system as a whole appears capable of supporting business investment and expansion."

Still, he said Fed policymakers face a challenge in deciding when to begin withdrawing all the liquidity the central bank has dumped on the market during the past year to support the financial sector. He said the Fed may need to pull back before an economic recovery is fully evident.

"There can be a strong temptation to hesitate when emerging from a recession, awaiting conclusive signs of economic growth," he said. "Keeping inflation well contained may require action before a vigorous recovery has had time to establish itself."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.