WASHINGTON, March 4 (Reuters) - Atlanta Federal Reserve President Jack Guynn, in a sign that some policy-makers are starting to think about higher rates, on Thursday warned businesses not to count on low borrowing costs as growth builds.
"The steep interest-rate cuts of 2001 and 2002 were not neutral monetary policy," he said in remarks prepared for delivery to Atlanta real estate executives and released in advance.
"Rates were reduced in response to a substantially weakened economy. As the economy returns to more normal rates of growth, interest rates will adjust," Guynn said.
"While we've seen how accommodative monetary policy can cushion the downside of an economic cycle, it will be appropriate at some point to get back to a more neutral setting consistent with an expanding economy," he said.
Fed funds have been cut 13 times since 2001 to a post-1958 low of 1 percent in the face of a recession and economic shocks following the Sept. 11, 2001, attacks on U.S. cities.
"Put another way, just as I don't want future inflation concerns to play a major role in business decision-making, I also don't want businesses to build their plans on expectations of a continuation of accommodative monetary policy without regard to prospective economic conditions," he said.
The Fed held rates steady at its last policy meeting on Jan. 27 and 28 but changed the accompanying statement on its decision, dropping a vow to keep rates low for a "considerable period" and saying instead it "can be patient in removing its policy accommodation".
Guynn said the U.S. central bank could afford to take this position because of low U.S. inflation and a track record for stable prices. But he warned this could not be taken for granted.
"It is indeed a luxury to have an inflation environment in which policy-makers can be patient in ensuring the economy has gained a solid footing. That said, luxury comes with a price tag, and patience is not unlimited."
He also said monetary policy had helped cushion the downturn and there was now clear evidence the economy was well on the road to recovery.
"Two months into 2004, there now appears to be a clear pattern of solid and sustainable growth," he said, adding that although job creation had been weak, it was starting to improve.
"Despite the uncertain pace of job growth, there's evidence that businesses are feeling more pressure to expand payrolls."
Weak employment growth has marred the recovery so far and dogs President George W. Bush's campaign to win a second term in office in elections this year.
As a result, financial markets are waiting for February's employment report, due on Friday, and expect it to show the economy added 125,000 new nonfarm jobs compared with 112,000 in January.
But Guynn said the high rates of productivity, which have allowed firms to lift output without adding more workers, would not slow dramatically.
"I don't foresee a dramatic slowing of productivity gains, and therefore I expect that businesses may add new employees at a somewhat less rapid pace than in other recent cycles." |
