For the archives
Fed's Stern Sees Economic Rebound With Low Inflation
From Bloomberg
By Andrew Ward and Brendan Murray
Minneapolis, Feb. 15 (Bloomberg) -- The U.S. economy is close to recovering from recession and ``subdued'' growth without inflation may allow Federal Reserve policy makers to hold interest rates steady for some time, said Gary Stern, president of the Fed Bank of Minneapolis.
``I don't expect to be confronting a serious inflation problem in the next several quarters,'' Stern said in an interview. ``So my foot is not heading for the brake,'' he said, referring to the possibility of the Fed raising rates to slow the economy.
Stern's comments follow remarks this week from Atlanta Fed Bank President Jack Guynn that policy makers are prepared to raise interest rates this year if a stronger-than-expected recovery rekindles inflation concern.
There is little chance of a surge in economic growth because company executives are ``cautious'' about the rebound, Stern said. ``That does imply to me that the initial stages, the first quarter or two of the recovery are likely to be rather subdued.''
Stern is a voting member this year on the Fed's Open Market Committee, which decided last month to end the most aggressive series of rate reductions in the 14-year tenure of Fed Chairman Alan Greenspan.
The Fed lowered its benchmark overnight lending rate 11 times last year to a 40-year low of 1.75 percent. Four of those cuts came after Sept. 11, to help reverse a slowdown and counter a decline in demand after the terrorist attacks.
Recession May Be Over
The economy fell into recession in March, according to the National Bureau of Economic Research, which charts U.S. expansions and contractions. Gross domestic product grew at a 0.2 percent annual rate in the final three months of last year after shrinking at a 1.3 percent pace in the previous quarter.
Stern said it may be difficult to determine that the recovery has taken hold. ``The data that we get on the economy don't all turn up simultaneously,'' he said. ``So the general character of the reports is likely to be kind of mixed for some time.''
Still, there's a ``very good chance'' the group will determine the recession has ended by now, Stern said.
``I had been expecting that unemployment would go up a little further,'' he said. Unemployment fell to 5.6 percent last month from a six-year high of 5.8 percent in December. While unemployment may rise again, ``information on the labor market have been more positive than I personally earlier expected,'' Stern said.
Inflation in Check
That doesn't mean growth will accelerate so rapidly that inflation becomes a concern in the next several quarters, he said.
``I don't know that the inventory correction process is over,'' Stern said. ``I think that improvements in capital spending are still some time off. I think there is some remaining caution coming out of 9/11 uncertainties. I think there is clearly pressure on earnings in some sectors.''
Moreover, he said, ``economies abroad are not distinguished by rapid growth these days for the most part.''
Inflation has stayed in check throughout the recession, making it easier for central bankers to cut rates. The price deflator tied to gross domestic product, fell at a 0.3 percent annual rate in the fourth quarter. That was the biggest decrease since the first quarter of 1952 and followed a 2.2 percent pace of increase in the previous three months.
Producer prices in January were 2.6 percent lower than they were in the same month last year, the biggest decrease since the 12 months that ended in February 1950, the Labor Department reported today.
That's why Stern said he isn't worried the recovery will be so rapid that the Fed will worry about inflation.
``The economy doesn't turn on a dime,'' he said. ``Inflation is not going to be the kind of issue that we're going to get aggressive about in the next several quarters.''
Policy makers have some leeway, he said. ``It's important that we get policy approximately right. It's not so important that we get it precisely right.''
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Best Regards, J.T. |
