Hi Susan, it's the weekend, we're supposed to be relaxing. Time for Stockaholics meeting.
Fed Ready to Act if Economy Slows Further
Apr 21 3:25pm ET
By Ross Finley
DEWEY BEACH, Del. (Reuters) - Federal Reserve Bank of Philadelphia President Anthony Santomero said on Saturday the Fed was ready to act quickly if the sluggish U.S. economy weakens further, making clear the central bank is poised to cut rates again if growth does not rebound.
Santomero, who is not currently a voting member of the Fed's policy-setting committee, said he did not expect the economy to fall into a recession -- typically defined as two quarters of economic contraction.
He also told reporters he sees increasing signs that the economy is stabilizing.
"Should further weakness in spending materialize, the Fed has the latitude to again respond quickly and effectively. Just as I believe we have done in the past four months," Santomero told an audience of bankers at a regional conference.
He was speaking just days after the Fed took financial markets off guard with a surprise half-point cut in the benchmark lending rate to 4.5 percent. It was the central bank's fourth half-point reduction in borrowing costs this year -- and its second between regular scheduled meetings -- in a bid to kick-start flagging economic growth after a 10-year expansion.
Announcing Wednesday's rate cut, the Fed cited concerns that a sharp fall in business spending on investments and a drop-off in stock prices threatened to dampen consumer confidence and spending -- placing the economy at risk of an unacceptably poor performance.
The Fed next meets to set rates on May 15 and economists widely expect another interest rate cut of at least a quarter percentage point.
Santomero said he expected the economy, which grew at a paltry 1.0 percent annualized rate in the fourth quarter of last year, will continue growing sluggishly through the first half of this year before again rebounding to a healthier pace.
"I expect that growth will remain slow throughout the first half of 2001. While considerable uncertainty remains and there are risks along the way, I do not expect this slowdown to halt the economic expansion," Santomero said.
CAPITAL SPENDING CONCERN
Echoing the Fed's statement accompanying Wednesday's rate cut, Santomero said businesses had made progress working off a stockpile of inventories and consumer spending had held up "reasonably well" despite recent signs of slowing.
He said a rise in the Philadelphia Fed's April Business Outlook Survey of manufacturing -- which on Thursday topped expectations and showed a slower pace of decline than in recent months -- suggested that the decline in the recession-mired industrial sector "should soon bottom out."
"We are in a period of uncertainty with mixed signals from the data but there are more signals indicating stabilization in the economy than we had seen before," Santomero told reporters after delivering his speech.
But fallout from the rapid economic slowdown and the gloom bred on Wall Street over the outlook for earnings had the potential to further damage business investment, he said.
"These factors, together with the possible effects of recent reductions in household wealth on spending and slower growth abroad, threaten to keep the pace of economic activity unacceptably weak," Santomero said.
He also said the economy could sustain a growth rate of about 3.0 percent to 4.0 percent per year with an unemployment rate between 4.0 percent and 5.0 percent without accelerating core inflation beyond its current rate of roughly 2.5 percent.
AGGRESSIVE FED RESPONSE
The Fed's current interest-rate cutting campaign, which kicked off in January, showed an appropriate "aggressive" response to changing economic conditions, Santomero said.
And with inflation fairly tame and benign expectations for prices over the longer term, he said the Fed had the room to lower interest rates further if the need arose.
Looking forward, Santomero told reporters the labor market was "key to future movements in the economy," adding that he expected the unemployment rate, currently at 4.3 percent, to rise in the months ahead if growth remained sluggish.
"Of necessity the unemployment rate will move up until we get real growth up to an acceptable level," he said. |
