Fed officials fret on growth, point to rate hold
SOURCE:
Reuters
2008-08-15 15:53:05
BLOOMINGTON, Illinois (Reuters) –
Two top Federal Reserve
officials on Friday voiced concern about weak U.S. economic
growth for the rest of 2008 and said inflation, while a worry,
should start to fade over time.
The comments by Chicago Federal Reserve Bank President
Charles Evans and Atlanta Fed Bank President Dennis Lockhart
suggested the Fed is in no hurry to start raising interest
rates while the economy remains in a funk.
Lockhart even said he would not rule out cutting rates if
circumstances warrant — unusual at a time when Fed watchers
almost uniformly expect the central bank’s next move to be rate
increase.
Evans said the current 2 percent federal funds rate was
“not especially stimulative” to growth but further cuts might
not help the most distressed parts of the market.
“The financial market turmoil has meant that our funds rate
reductions have led to less credit expansion to households and
businesses than would typically be the case,” he said in a
speech to the McLean County Chamber of Commerce in Bloomington,
Illinois.
A WEAK SECOND HALF
Lockhart and Evans were united in forecasting weak
second-half economic growth, especially as the impact of the
federal stimulus package starts to fade.
“The second half of 2008 will likely be extremely
sluggish,” Evans said.
Growth will probably not return to a near-trend level of
2.5 percent to 3.0 percent, annualized, until 2010, he added.
Evans’s comment echoed that made on Thursday by Minneapolis
Fed President Gary Stern, who said it could be one to three
years before the economy picks up a head of steam.
Stern is a voter on the policy-setting Federal Open Market
Committee in 2008. Evans and Lockhart will both vote in 2009.
Lockhart also said economy in the second half could be
“quite weak” with “risks to the downside.”
Financial markets recently have pared back on ideas that
the Fed will start raising benchmark interest rates soon to
tamp down inflation.
Bets on a quarter-point increase to the 2-percent federal
funds rate by year-end are running at about one chance in
three.
INFLATION MODERATES?
Lockhart said inflation is “worrisome” at present, but the
tumble in oil prices since early July would help “a great
deal.”
The government reported this week that U.S. consumer prices
in the 12 months to July jumped at the fastest pace in 17
years, led by increases in the cost of energy and food.
“We’ll see some alleviation of the inflation pressures, and
having oil and other commodities come down so strongly helps,”
Lockhart said.
But Evans said some pass-through from high energy prices is
already under way, boosting core measures of inflation even as
headline prices might start to fall.
“We run the risk of persistent widespread price increases
being built into the expectations of households and businesses,
and those producing persistently higher bases for both
inflation measures,” Evans said.
The Chicago policy-maker said the fact that inflation has
not yet become embedded in wage growth is not a cause for
complacency.
Still, talking to reporters he conceded the “resource
slack” expected from a long period of below trend growth should
start to temper inflation.
The United States has shed jobs for seven consecutive
months, a cumulative loss of over 450,000, pushing the jobless
rate up sharply to the current 5.7 percent.
FISCAL HELP
Evans said the recent stimulus package had been a rare
event for fiscal policy, in that checks were mailed to millions
of Americans in a timely enough way to hit when the economy was
weak.
By pulling some consumer spending forward, the package had
helped prevent the economy from contracting in the second
quarter, as some had forecast, Evans said.
In general, both fiscal and monetary policy have helped
prevent a “severe economic downturn,” the risks of which have
diminished even though the near-term outlook is sluggish, he
said.
(Additional reporting by David Lawder in Washington;
Editing by Neil Stempleman)
Major Newsire & Press Release Distribution with Basic Starting at only $19 and Complete OTCBB / Financial Distribution only $89
Get Unlimited Organic Website Traffic to your Website
TheNFG.com now offers Organic Lead Generation & Traffic Solutions