Bloomberg News
Thu, 15 Jun 2000, 8:24pm EDT
Fed Officials Say U.S. Economy Is Still Growing Too
Rapidly
By Noam Neusner
Washington, June 15 (Bloomberg) -- The economy is still growing too fast and
the Fed needs to slow it down, two Federal Reserve policy-makers said today.
There are ``some scattered signs of slowing,'' said Chicago Fed Bank President
Michael Moskow. ``But we still are in a period where aggregate demand is
growing at a pace that's exceeding potential supply,'' he said in a Grand Rapids,
Michigan, speech. ``I haven't seen any significant adjustment up to this point.''
Richmond Fed Bank President J. Alfred Broaddus sounded an even more
concerned tone in Vienna, Austria. Core inflation, excluding food and energy
prices, ``has shown signs of accelerating,'' Broaddus said.
Today's comments echo those of other Fed officials this week and could suggest
policy-makers don't necessarily agree with most investors that the central bank
won't raise interest rates at its next meeting on June 27-28.
New York Fed President William McDonough, San Francisco Fed President
Robert Parry and Kansas City Fed President Thomas Hoenig all spoke this week
and all made cautionary remarks about the threat of inflation and expectations
that six Fed interest-rate increases in the last year have succeeded in slowing
the economy sufficiently to keep the nine-year-old U.S. expansion running.
McDonough, Broaddus and Parry are voting members of the Fed's policy-setting
Open Market Committee; Hoenig and Moskow don't vote this year.
The implied yield of Fed futures contracts, a gauge of investor expectations of
future FOMC interest rate moves, shows that most investors expect the central
bank to leave the overnight bank lending rate at 6.5 percent this month and
economists at all 29 banks and securities firms that deal directly with the Fed
expect no rate increase.
Dampened Conviction
``On the one hand, investors are convinced the economy is slowing down, which
takes the pressure off the Fed,'' said Charles Crane, market strategist at Spears,
Benzak, Salomon & Farrell Inc., which oversees $5 billion. Yet Broaddus'
comments, combined with this morning's report from the Fed showing an
unexpected increase in industrial production in May have dampened that
conviction, he said.
``Labor shortages are now widely reported in a number of sectors and industries,''
Broaddus said. ``On their present course, U.S. labor markets will eventually
tighten to the point where competition for workers will cause wages to rise more
rapidly than productivity, which sooner or later would induce businesses to pass
the higher costs on in higher prices.''
Moskow warned of imbalances that still jeopardize the economy. ``Increased
productivity growth raises our potential growth, which represents the supply of
goods and services we produce domestically,'' he said. ``There's evidence that
demand has been outstripping even this higher supply, and the presence of this
imbalance has been an important factor in recent monetary policy discussions
and decision.''
The Fed will ``need to remain vigilant regarding actual and potential imbalances
to ensure that the U.S. economy sustains its strong performance for years to
come,'' Moskow said.
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