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. |
