Fed's Minehan: Moderate recovery on track
URL:http://www.bayarea.com/mld/bayarea/business/4867561.htm
BY KATHIE O'DONNELL
Reuters
HARTFORD, Connecticut - Boston Federal Reserve President Cathy Minehan on Friday urged patience with the slow U.S. recovery and said she expects the economy to keep growing at a moderate pace in the new year.
In the first comments by a top Fed official in the new year, Minehan stressed the long-term resilience of the U.S. economy despite uncertainty about a possible war with Iraq, which was holding back growth.
Businesses are likely to resume a normal pattern of hiring and investment once that uncertainty lifts, she said.
Minehan is not a voting member of the Fed's interest-rate setting committee this year, but she participates in policy discussions.
"It looks to me as if the recovery is well positioned to continue, moderately but steadily. We just need to have some patience," Minehan told the Connecticut Business and Industry Association.
"I believe one key to assessing prospects for the U.S. economy in 2003 is never to underestimate the resilience of the U.S. economy," she said.
Minehan said consumer spending should continue to be "reasonably solid."
Although economic growth in the fourth quarter of 2002 was likely to be "very slow," it should pick up to a 3 percent to 3.5 percent pace by the end of 2003, she said.
Most economists believe the economy slowed to a rate of 1 percent to 2 percent in the last three months of 2002 as consumer spending eased and manufacturing activity stalled.
Minehan's comments were in line with other Fed policymakers who have said recently that uncertainty about Iraq has cast a pall over economic activity that will take some time to clear. The Fed holds its next policy meeting Jan. 28-29 and is widely expected to leave interest rates steady.
MORE NORMAL SPENDING
With consumer spending unlikely to exceed last year's solid pace, economists have stressed the need for businesses to start investing again to return the recovery to a solid path.
Minehan said that business plans to improve efficiency and deal with excess capacity are proceeding apace and should provide the foundation for investment growth in 2003.
During last year's recovery, companies were rebuilding profitability and learning to cope with modest demand growth and were "abnormally reluctant" to hire and invest, she said.
However, "as some of the uncertainty surrounding potential geopolitical disruptions lifts, as I hope it will, I expect businesses to resume a more normal pattern of hiring and capital spending," Minehan said.
Data on new orders for non-defense capital goods, while volatile, also suggest modest growth for the future.
On the consumer side, the Boston Fed president said household incomes were growing and consumer spending is "still hanging in there," adding that some of the doom and gloom about holiday retail sales may reflect unrealistic expectations.
"The fundamentals suggest a moderate expansion of consumption in 2003," she said, citing more stable stock markets, high levels of housing wealth and increases in incomes.
Although fiscal stimulus from the federal government was supporting the economy -- and President Bush is due to unveil a new economic package on Tuesday -- Minehan did say that the potential drag from large local and state budget deficits was a concern.
Addressing another fear of financial markets, Minehan downplayed worries about deflation, or widespread falling prices.
"I expect that growth over the next couple of years or so will be such that we will see a continued pattern of very low but positive rates of inflation," she said.
As evidence that deflation is not in the cards, Minehan noted that although prices for many manufactured goods have fallen, prices for services have been rising by 3 percent or more for years.
Indeed, Minehan raised a concern over the pace of some price increases. "In fact, rising prices for things like medical services and insurance are worrisome as they could be a drag on the current rate of economic growth," she said.
The Fed cut the benchmark federal funds rate to 1.25 percent in November to help the economy through its soft patch and is expected to hold it steady for the next several months as it waits for more solid growth. |
