August 21, 2003
Fed Official Says Interest Rates Can Stay Low Till Economy Rises
By REUTERS
he Federal Reserve can keep interest rates low until the United States economy more closely approaches full capacity, J. Alfred Broaddus Jr., the president of the Federal Reserve Bank of Richmond, Va., said yesterday.
The output gap, which measures unused labor and production capacity, is particularly wide right now, meaning the economy can potentially grow quickly without generating inflation.
"Until actual growth in demand accelerates and allows this gap between the potential level of growth in the economy and the actual level to close, we're going to have a situation where I think the Fed can probably remain quite accommodative" in its monetary policy, Mr. Broaddus said on CNBC television.
Mr. Broaddus, who is a voting member of the Fed committee that sets interest rates, added that he was confident that growth would accelerate in the months ahead.
"I don't want to overstate it — we're still watching this very closely," he said, "but at least as far as many of the key recent numbers are concerned things look a little stronger."
Among the positives, Mr. Broaddus cited retail sales, which rose 1.4 percent in July, and Tuesday's "really strong" housing starts figures for July, which rose to a 17-year high.
He said the main head wind remained the labor market.
"We have not seen the pickup in employment we really need to see to be confident this expansion really has lasting momentum," Mr. Broaddus said.
He acknowledged there was a downside to one feature of the recovery — robust productivity growth, as companies have been able to meet demand with existing workers instead of hiring new ones.
"Rising productivity growth, which is longer-term good news, has in a sense produced a problem, because it has been a factor retarding job growth," he said. |
