Fed's Poole-US recession possible, not 'best guess'
By Barbara Hagenbaugh
WASHINGTON, Jan 18 (Reuters) - A recession in the U.S. economy is possible but is ``not a best guess,'' Federal Reserve Bank of St. Louis President William Poole said.
``My message is that these times seem much more uncertain than they really are,'' Poole said in a speech to the Missouri Bankers Association on Monday. The text of the speech, which was closed to the media, was made available to Reuters on Thursday. ``Yes, a recession is in the realm of possibility but it is not a best guess at this time.''
Poole, a voting member this year on the Fed's rate-setting committee, predicted the U.S. economy will continue to grow in 2001, although at a slower pace than in previous years.
``Growth prospects remain excellent,'' he said. ``The inflation outlook for the next couple of years and long-term inflation expectations remain low. In sum, the near-term outlook has changed -- but it is always changing in some respect or other -- and the long-run fundamentals are sound.''
Poole's comments came about two weeks before the Fed's next meeting on interest rates. The Fed is expected to cut interest rates after the conclusion of the two-day meeting on Jan. 31, following a surprise move earlier this month when it cut rates by half-a-percentage point in between meetings.
The Fed's move was in response to a growing stack of data showing that the U.S. economy had slowed markedly. Some economists are predicting that the world's largest economy may be heading toward -- or already be in -- a recession.
Poole said the Fed can try to influence the economy in the short term, but noted that in the long-run, the Fed must focus on keeping inflation under control.
``My argument that the Fed can cushion short-run fluctuations in employment and economic activity most definitely does not imply that we can eliminate all such fluctuations,'' he said.
``Along with private business analysts, we are often taken by surprise by current economic developments,'' Poole said. ``We are no better than anyone else at forecasting the unforecastable.''
NO GUARANTEE
The St. Louis Fed chief repeated that the market plays an important role in keeping the economy on solid footing.
``Whether the Fed can ensure that the economy will not fall into a recession this year is really an issue of whether the markets and the Fed together can anticipate, and offset, developments that could lead to a recession,'' he said.
``There is no guarantee as to the outcome,'' he noted.
If the market moves the right way, the Fed may be able to stand still until it gets a clearer picture because interest rates have already adjusted for a change in Fed policy.
``The Fed does not have to be, and should not be, hyperactive,'' he said. ``Given that the market understands well how this process works, the Federal Reserve often can hold a steady federal funds rate target while waiting for the situation to clarify.''
He continued, reflecting on recent experience, ``The fact that market interest rates moved ahead of the FOMC does not mean that the Fed got behind.''
Poole said that because the market often moves ahead of Fed actions, the lag that economists often focus on between when the Fed raises or cuts rates and when that move is actually felt across the economy may be much shorter than assumed.
``If interest rates decline in anticipation of Fed actions, then the policy lag should be measured from the decline in market interest rates and not from the date of Fed action anticipated by market interest rates,'' he said. |
