NY Fed Says It Has Time Before Hiking Rates
By Ellen Freilich
Thursday April 18, 12:25 pm Eastern Time
HEMPSTEAD, N.Y. (Reuters) - Federal Reserve Bank of New York President William McDonough said on Thursday the Fed is unsure about how strong the U.S. economy may be in the latter half of this year and can be patient before raising interest rates.
``When we think the economic recovery is much more clear and certain than it is now, we will have time to do what is necessary,'' McDonough told business leaders at Hofstra University Club.
``The second half of this year should be quite strong...but a self-fulfilling prophecy could mean that growth slows in the second half of this year,'' McDonough said.
``Policymakers like me have to sniff the wind and that brings us to the conclusion that we're not really sure where the economy is going. So you watch and wait and do what is necessary when it becomes necessary,'' he said.
McDonough's remarks came a day after Federal Reserve Chairman Alan Greenspan signaled in testimony before Congress that no U.S. interest rate rises are imminent, saying the strength of the recovery was unclear and that oil prices bore close watching.
This central bank caution over the outlook has caused credit markets to scale back expectations as to when the Fed will start raising short-term interest rates, now at 40-year lows of 1.75 percent.
Treasury prices were largely unchanged after McDonough's remarks.
``They are saying the same thing and piping the same tune,'' said John Roberts, head government bond trader at Barclays Capital in New York.
McDonough said rebuilding of inventories that were drawn down as the economy slowed sharply last year will give a boost to growth in the first half of this year. Tax cuts, cheap credit and government spending on security to combat terrorism also are supporting the economy, he said.
``But it will be hard to get an additional kick from the consumer in the second half of the year,'' he said, adding that key to the ongoing strength of the recovery is business investment.
``Business fixed investment has been very slow and is still slow. So why are we pulling out of recession? Because of consumer spending,'' he said.
Another factor helping the economy is strong productivity growth, which McDonough described as ``real and lasting.'' He expects output per worker in the first quarter of 2002 of ``6 percent and maybe more. It could be as high as 8 percent.''
Productivity grew by 5.2 percent in the fourth quarter of 2001 and this worker efficiency has been a key factor in the strong levels of U.S. growth without inflation for most of the 1990s and into this century.
``We are quite convinced at the Federal Reserve that this improvement will continue and the speed limit of the American economy is faster'' than was thought before 1996.
Globalization also is restraining pricing pressures, bringing cheap imports from low-wage countries into the United States, creating a tough environment for U.S. corporations.
``Businesses' pricing power has gone down to zero. Even in services, with the exception of health care...That is a tough world to be in if you're running a business,'' McDonough said.
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