: DJ Fed's Minehan -2: Inflationary Risks Seen Down The Road
BOSTON (Dow Jones)--The delayed impact of interest rate cuts and the effect
of third-quarter tax rebates should set the economy up for a second half
recovery, but there is no signs yet of a turnaround, Federal Reserve Bank of
Boston President Cathy Minehan said Monday.
Noting in a speech that economists at the Boston Fed are forecasting such a
recovery in the economy, Minehan told a meeting of the Boston Municipal
Research Bureau that she is "guardedly optimistic that the consensus
forecast is a good one."
"That is, starting in the second half, growth will pick up in both the (New
England) region and the nation," she said.
Minehan said that consumers are "the ace in the hole" for preventing a
recession, because household spending has so far held up despite a sharp
deterioration in manufacturing activity.
"To those most seriously affected - the manufacturing sector - it sure feels
like" a recession, she said. However, "so far, apparently, consumers have
not moved into recession mode," she added.
One source of support for consumption spending in the third quarter will
come from the Bush administration's plans to send rebates to taxpayers in
the third quarter, she said.
"What will consumers do with the relatively small windfall? Historical
experience with tax rebates suggests that consumers will spend about half
and either save or pay off debt with the rest, but the split between
consumption and saving could be 25/75 or even 75/25," she said.
"If the split is 50/50, this would add between one-half and three-fourths
percentage point to GDP growth, likely split between the latter half of the
third quarter and the first half of the fourth," she said.
Meanwhile, much of the impact of the two-and-a-half percentage points worth
of interest rate cuts instituted by the Fed this year "will be felt in the
latter part of this year, possibly providing a boost along with the fiscal
stimulus just when other parts of the economy may be turning up," Minehan
added.
If this rebound occurs, it could start to generate inflationary risks
"further down the road," Minehan warned, noting that "this may become a
concern that needs to be addressed."
-By Michael Casey, Dow Jones Newswires,
michael.j.casey@dowjones.com; 201-938-2009
(END) DOW JONES NEWS 06-18-01
01:17 PM
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