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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Dealer who wrote (37174)	5/23/2001 12:45:34 AM
From: Sully-	Read Replies (1) \| Respond to of 65232

Fed Officials Sound Upbeat Note on Economy By Ellen Freilich NEW YORK (Reuters) - Federal Reserve officials expressed optimism about the U.S. economy on Tuesday, predicting growth would start to pick up in the second half of the year as the Fed's policy of slashing short-term borrowing costs begins to bite. Federal Reserve Bank of Philadelphia President Anthony Santomero said the economy would start to reaccelerate in the second half of this year and continue to pick up in 2002, extending the economic expansion that is now in its eleventh year. The Fed's five rate cuts this year will play a key role in that upturn, Santomero said in a speech in Willow Grove, Pennsylvania. Federal Reserve Governor Edward Kelley was a little more hesitant, saying although he expected the economy to resume its steady improvement soon, Americans shouldn't expect to see U.S. economic growth ``booming back'' to the heady growth rates of recent years. The central bank has cut short-term interest rates five times this year, twice in January, and once each in March, April and May for a total reduction of 2.5 percentage points in less than five months. Its key federal funds overnight bank lending rate now stands at 4.0 percent. ``Over the remainder of this year and into early 2002, the impact of our recent actions should gradually ripple through the economy,'' Santomero said. One reason for this is that more rapidly moving financial markets means that it now takes less time than it once did for changes in monetary policy to impact the economy, said Fed Bank of New York President William McDonough. ``Three or four years ago you would have said the average time of application of the lag of monetary policy was one to two years, i.e., 18 months. With the very much more rapidly moving markets, almost certainly the lag in monetary policy application is shorter,'' McDonough told reporters after addressing the New York Japan Society. Meanwhile, Minneapolis Fed President Gary Stern said economic activity seemed to have stabilized at its current subdued pace and that pared down business inventories, brisk housing activity and consumer spending were some of the reasons to be optimistic about the economy in the short run. RISKS REMAIN While they listed reasons to be optimistic, Fed policymakers also had a back-pocket list of reasons to be wary, including the threat to consumer spending from a weaker labor market, slower business spending and higher energy prices. Consumer spending, which drives some two-thirds of U.S. economic growth, has held up relatively well despite the sharp slowdown in economic growth, but that could change, Santomero said. ``If a pattern of job losses emerges, and it is significant enough to undermine consumers' willingness to spend, this would pose a clear risk to the economy's prospects,'' he said. The U.S. economy shed nearly a quarter of a million jobs in April -- its worst monthly performance in a decade -- pushing the jobless rate up to 4.5 percent. The Labor Department will release May employment data on Friday, June 1. Kelley said that while a surge in energy costs could impede a return to sustainable economic growth, the record debt levels of U.S. consumers was not yet standing in the way of the retail spending that is the lifeblood of U.S. economic growth. ``For some time now our personal savings rate in this country has turned negative, which means we as a people are spending more than our income and obviously when you do that you go further into debt,'' he told the Rotary Club of Portland. While levels have reached record levels, consumers are handling their debt burdens for the time being, he said. ''We're handling it okay, it's not a problem right now but it's a worry.'' ``If the consumer decides that he or she doesn't want to spend anymore then the economy will begin to weaken,'' he said. ''Consumers are still out there spending. They are in the malls, they are buying things.'' Meanwhile, a recovery in business investment spending will take time, Santomero said. ``Historically, when there is an acceleration in overall economic growth, it is led by consumer spending, and then later amplified by business investment,'' he said. Inflation was one risk Fed officials did not seem concerned about in the near-term. Santomero echoed a statement by the Federal Open Market Committee, which said last week after cutting interest rates that it expected weakening labor and product markets would contain price pressures. Meanwhile, U.S. financial markets seem to be signaling the economy will pick up next year. The phenomenon of long-term Treasury yields rising against a backdrop of Fed cuts in short-term interest rates meant the market was pricing in an economic recovery, Santomero said. A strong dollar seemed to be spelling out a similar message, he said. ``I take the value of the dollar as a sign of support for the U.S. economy as investors overseas come into the United States economy even while we are going through this transition,'' Santomero said. biz.yahoo.com Ö¿Ö