[B] Meyer says Fed needs to calibrate easing to avoid "overshooting"
--Meyer: Risks still tilted toward excessive US economic slowdown
--Meyer says US inflation remains above acceptable longer-run level
--Meyer: Fed rate cuts, budget stimulus should spur gradual recovery
--Meyer says continued rise of the dollar versus euro "a puzzle"
--Meyer: Impact of stock market drop should continue to curb US growth
--Meyer says stock price decline likely to be "longer-lasting"
--Meyer: Lower equipment spending may trim US productivity growth
By Edward Kean
Washington, May 24 (BridgeNews) - The Federal Reserve needs to make sure it does not push interest rates too low and risk adding to inflation pressures as economic growth recovers, Fed Governor Laurence Meyer said Thursday.
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In remarks for delivery to an investment seminar in Edinburgh, Scotland, Meyer said the risks in the U.S. economy remain "tilted" in the direction of a sharper-than-necessary slowdown to contain inflation. A text of his remarks was released here.
But Meyer said the Fed "has to remember" its mandate for both full employment and stable prices. "Given that labor markets remain tight, that inflation remains above the rate that I would find acceptable over the longer run, and that core inflation has been edging higher, attention also must be given to calibrating the easing to avoid overshooting in the other direction in a way that ends up adding to price pressures as economic growth strengthens," Meyer said.
Meyer's comments suggest he may want to scale back the size of further Fed rate cuts, and perhaps, not ease much further. In a discussion of the U.S. economic outlook, Meyer said the negative impact of the stock market decline and the unwinding of "past excesses" in high-technology investment spending "will continue to be a drag on growth," even after the current inventory reduction is completed.
Moreover, Meyer indicated he thought the drop in stock prices in recent months likely will be "longer lasting."
The decline in stock prices is "a product, in part, of excesses that accumulated during the economy's earlier adjustment to the productivity acceleration," in the second half of the 1990s, he said. "In this case, the decline in equity prices is more than a cyclical correction and more likely longer-lasting reappraisal of fundamental value and risk," Meyer said.
But he said U.S. economic growth "should gradually recover" as the Fed's recent interest rate reductions start to influence the economy and as federal budget policy becomes more expansionary. The latter appears to be a reference to pending tax cut proposals in Congress. Also likely to help the economy may be a slight drop in energy prices and renewed interest in capital spending as a result of the "still-rapid pace" of innovation, he said.
Meyer said the sharp drop in equipment spending is likely to "take a little edge off" productivity growth.
Nevertheless, Meyer said the drop in the stock market and the cutbacks in spending on technology do not suggest the productivity pickup of recent years was "a mirage."
Most observers are confident productivity growth will remain elevated, he said.
Turning to financial market issues, Meyer said he found the dollar's continued rise, particularly against the euro, "a puzzle." The dollar's rise against the yen is more understandable given Japan's economic troubles, Meyer said. Normally, he indicated, the dollar would have been expected to drop as a result of the economic slowdown in the U.S., the sharp decline in interest rates and the drop in stock prices. He theorized the dollar's continued vigor may reflect expectations that the U.S. economic slowdown is "only temporary" and that capital flows may be influenced more by long-term growth prospects in various countries than shorter-term fluctuations.
"The prospect of a return to robust growth in the United States that is above the longer-run expected growth in Europe may therefore continue to favor dollar-denominated assets," he said. "Indeed, this may be reinforced by the fact that dollar-denominated assets have become so much cheaper." |
