Fed's Santomero Says U.S. Economy to Recover `Around Mid-2002'
By Brendan Murray and Monee Fields-White
Washington, Jan. 8 (Bloomberg) -- The U.S. economy will recover from recession by midyear, more slowly than some analysts expect, because rising unemployment may curtail consumer spending, Federal Reserve Bank of Philadelphia President Anthony Santomero said.
Still, he suggested the economy may not need additional stimulus from lower interest rates.
``The roadblock can be stated simply: Consumers must be employed to spend,'' Santomero said in the text of a speech to the Greater Philadelphia Chamber of Commerce. ``Softness in the labor markets could put pressure on consumer spending and affect confidence going forward.''
Santomero is a voting member of the Fed's policy making Open Market Committee, which is next scheduled to meet Jan. 30.
The economy, in recession since March, contracted 1.3 percent in the third quarter last year and probably shrank from October to December, he said. A rebound won't come until ``around mid-2002 -- a few months later than the median forecast predicts,'' he said.
While inventory reduction is ``well along,'' it may take longer than expected for companies to reduce stockpiles enough that they need increase production to meet demand. Business investment will also be slow to revive, he said. ``I do not anticipate a recovery in business investment spending until the second half of 2002, but it must at least stabilize and not be a drag on economic growth,'' Santomero said.
`Cautious' on Rate Cuts
The Fed may not need to lower interest rates again, Santomero suggested. The central bankers made 11 ``rapid-fire cuts'' in interest rates last year, taking the benchmark overnight bank lending rate to a 40-year low of 1.75 percent.
Those moves take time to boost the economy, he said. Fed policy ``actions taken today will alter economic performance in the second half of 2002 at the earliest, so caution must be the watchword in the months ahead,'' he said.
The effects of the September terrorist attacks linger, he said. Retail sales in the fourth quarter likely be ``lower than hoped, still reflecting the shock of 9/11,'' he said.
Santomero cited about $200 billion in government spending and tax cuts as a potential lift to the economy because it represents 2 percent of gross domestic product. ``The stimulus associated with greater government spending and lower taxes should have a significant positive impact on the economy,'' he said. |
