Thursday April 26, 6:06 pm Eastern Time
Fed Less Optimistic About Quick Rebound
By Marjorie Olster
SANTA BARBARA, Calif. (Reuters) - Federal Reserve officials sounded less optimistic on Thursday about the chances for a U.S. economic recovery early in the second half of the year, saying that rebound might now be delayed.
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In an onslaught of Fedspeak, two Fed board governors and three regional bank presidents appearing at several different events around the country offered current views on the economy following their surprise interest rate cut last week.
The speeches left a clear impression that the Fed stands ready to lower rates further in the near future if economic weakness persists. Hopes for further rate cuts boosted stock prices moderately.
A few months ago, when the Fed began to lower rates in the face of a sharp deceleration in growth, central bankers had sounded confident the economy would spring back in the second half of the year. But they now seem to be changing their tune.
``For the nation, I am expecting a faster growth rate by the end of the year. The turnaround probably has been delayed somewhat,'' Federal Reserve Bank of San Francisco President Robert Parry told reporters after a speech in Santa Barbara.
``I think that the recovery is going to be perhaps in the initial stages somewhat more moderate,'' he added.
Philadelphia Fed President Anthony Santomero, speaking to financial analysts in Philadelphia, said he expects ''unacceptably slow'' growth through the first half of 2001 with a rebound likely in the second half of the year. But growth would reach more acceptable levels only in 2002, he added.
Both businesses and consumers have cut back heavily on spending recently, confidence has fallen and layoffs are mounting. Meanwhile, the manufacturing sector is contracting, the stock market has dropped sharply, energy prices are rising and California is mired in a severe power crisis.
Explaining the Fed's shock rate cut last week, Parry said recent data had confirmed the economy was experiencing a significant slowdown and the Fed thought lower rates would boost spending and confidence.
RATE CUTS LIKELY
The Fed has lowered interest rates aggressively since the beginning of the year to try to get the benchmark overnight bank lending rate down to a level that is commensurate with an economy that has slowed to a near standstill.
Last week's half-point cut in key rates was the fourth in four months and brought the federal funds rate to 4.5 percent.
Using language that Fed watchers usually interpret as a signal of further rate cuts, Parry said the Fed would continue to be ``especially alert'' in monitoring the economy.
Santomero read from the same script: ``Should further unexpected weakness in spending materialize, the Fed has the latitude to again respond quickly and effectively -- just as I believe we have in the past four months,'' he said.
Wall Street is anticipating another reduction on May 15 when the policy-setting Federal Open Market Committee
meets.
Parry said he does not expect the economy to fall into a recession and estimated the current growth rate to be a small positive. He predicted a more ``respectable'' pace by year-end but added the economy would not likely return to its full potential this year.
``No doubt, the road now and immediately ahead may be rocky, given the fact that there are some downside risks,'' Parry told regional business and political leaders.
RISKS ABOUND
Further declines in stocks or confidence could exacerbate the slowdown in spending and investment, officials said.
Kansas City Fed President Thomas Hoenig said a number of risks still clouded the economic outlook, including an overhang of business inventories and a possible slowing in retail spending as consumers increase their saving.
He also said historically high levels of business and consumer debt could be a drag on the economy if incomes fall.
Hoenig is a voting member of the FOMC this year while Parry and Santomero are not.
Santomero said an uncertain outlook for business is likely to depress capital spending.
U.S. growth slowed to an anemic 1.0 percent pace in the fourth quarter of last year and has stayed very weak in the first months of 2001 after years of booming consumer spending, business investment and huge stock market gains.
Preliminary first-quarter figures for gross domestic product growth are scheduled for release on Friday, and economists polled by Reuters forecast a rate of 1.1 percent.
Though the Fed is primarily concerned right now with averting a debilitating recession, Parry said there were clearly inflation pressures arising in certain parts of the economy, energy prices being one of them.
But Parry and Santomero both said the slack building up in this current slowdown may provide room for growth to pick up later without generating much inflation.
Highlighting one of the few bright spots in the economy, Fed Vice Chairman Roger Ferguson said the housing sector was holding up well despite the slowdown. Ferguson and Hoenig both spoke at the Levy Institute's conference on financial structure in upstate New York.
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At the bottom their should be a disclaimer that we screwed up and did not mean to take hurt the economy and your investments |
