The US will pay an economic penalty for the financial turmoil of the past few weeks but growth will continue to be healthy and there is no prospect of an early recession, Henry Paulson, the US Treasury Secretary, told The Times yesterday.

Mr Paulson said it would take some time before financial markets fully recovered from the turmoil of the summer but insisted that the US expansion, which is almost six years old, would continue in any case.

“There will be a penalty but the backdrop of the strength of the economy, the corporations, the institutions, is such that that we are resilient,” Mr Paulson said.

The recent turbulence meant that credit conditions had tightened as investors had reappraised financial risk, the Treasury Secretary said, and that would have a negative impact on the broader economy. “A reappraisal of risk means investors in a variety of asset classes are pulling back.”

Even as Mr Paulson spoke, global markets continued to reflect concerns about the economic impact of the crisis. The dollar fell to a record low against the euro and US equities also declined. Mr Paulson said some markets had already improved since the turmoil of last month but the crisis would unwind at different rates in different markets. “As you work your way through this, it’s going to be quicker in some markets than others.”

Mr Paulson said problems with sub-prime mortgages were a continuing source of concern. These loans, billions of dollars of which are already in default, were advanced over the past few years to higher-risk lenders at initially low interest rates, which are due to reset at much higher rates in the next few months.

Repackaged as securities used by many companies as collateral for borrowing, these loans have proved toxic to global investors, causing a loss of confidence in credit markets.

The Treasury Secretary played down employment figures that showed the first fall in US nonfarm jobs for four years in August and fuelled fears of a recession. He noted that, excluding government employment, the economy continued to add jobs in August, and said one month’s figures should not be viewed in isolation.

But private sector economists and, it seems, policymakers at the Federal Reserve, were more troubled by the data. Most worrying for central bank officials was a revision to previous months’ data that suggested the labour market weakness began before the credit crunch started to bite.

The Fed’s policymaking committee is expected to cut its key interest rate next Tuesday. The only real uncertainty is whether it will cut its target for the Federal Funds rate by 25 basis points or 50 from the current 5.25 per cent.

Mr Paulson said the main difference between the current economic environment and that of recent financial crises was that the global economy was much stronger today and would provide critical support for the US as it weakened.

He rejected suggestions that responding to the financial market turmoil, as the Fed has done with increased liquidity for markets, and the Bush Administration has with support for homeowners in distress, represented a bailout of irresponsible investors.

The financial problems had been caused by a “lack of discipline” in lending policies, he acknowledged. “There will be losses along the way and certain institutions that do not perform well. I don’t think it’s the job of regulators to protect against those losses.”

Mr Paulson visits London next week for his first talks with Alistair Darling since he became Chancellor, as well as a meeting with Gordon Brown. He also travels to Paris to meet Christine Lagarde, the French Finance Minister. Mr Paulson said the recent financial turmoil was likely to be the main focus of the discussions.

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