Thursday July 11, 9:10 pm Eastern Time
Reuters Market News
Stock drop muddies US economic waters-Fed's Poole
By Tim Ahmann
(Adds comments, background)
ST. LOUIS, July 11 (Reuters) - St. Louis Federal Reserve Bank President William Poole said on Thursday the U.S. economy appears to be doing all right but that the prolonged stock market sell-off had made the outlook "murkier."
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"The real economy appears to be doing OK," Poole told Reuters in an interview. "But we do have a high degree of uncertainty, in the equity markets in particular," he said. "It's made the situation murkier."
Poole said the stock market's prolonged sell-off was likely to slow or delay a recovery in business investment that officials at the central bank have said is key to building a solid, sustainable expansion.
"The big unknown here is business investment," he said.
U.S. stock markets stabilized a bit on Thursday, with the blue-chip Dow Jones industrial average shedding just under 12 points to close at 8,801.53 and the tech-heavy Nasdaq Composite Index rising over 28 points to 1,374.43. But on Wednesday, the Nasdaq had closed at its lowest level since May 1997, and other major indexes also hit multi-year lows..
"I think we have to have a very open mind about what's happening and how to read the current data. We have to be ready to say, 'Hey, wait a minute, either the upside potential or the downside is in fact being realized,'" Poole said.
The regional Fed bank chief said he did not see any immediate inflation risk, adding that the central bank's inflation-fighting credibility and low inflation expectations allow policymakers to exercise more patience than might otherwise be possible in deciding when to move interest rates off their 40-year lows.
Poole also said he did not see any "important" risk of deflation, widespread price declines of the type that have bedeviled Japanese policymakers for years.
Last year, the Fed cut the benchmark federal funds rate 11 times to 1.75 percent in one of its most aggressive campaigns ever against economic weakness.
Earlier this year, many economists had thought the central bank would have already raised rates, but a sluggish economic recovery, and now the steep market sell-off, have analysts looking toward late this year, if not next, for a Fed move.
"We continue to enjoy a very firm expectation of low inflation remaining and those expectations, the result of extensive experience and confidence in the central bank, are a source of great strength in our situation," Poole said.
"I think we'll get a lot of information in ample time ... (to) start to think about whether it's time to start changing policy direction," he said, noting that many business investment decisions are made well before any money is spent.
"We are in a situation in which we don't have to rush," said Poole, a monetarist long known as an inflation hawk.
NEW LIST OF WORRIES
After growing at a startling 6.1 percent annual rate in the first three months of the year, the U.S. economy appeared to brake sharply in the second quarter, analysts say.
But many expect U.S. gross domestic product to expand a bit more quickly in the second half of the year, and quicken the pace in 2003.
Poole said that consensus forecasts sounded appropriate, even though the stock market's dismal performance increased the likelihood they could be well wide of the mark.
"The prevailing main stream forecasts make an awful lot of sense with what we know and I think that there's reason to be reasonably confident about that outcome," he said.
"But there is a tremendous range of uncertainty about outcomes and that range of uncertainty has had a whole new element added to it in recent months," he cautioned.
"If you had asked me on September 11th, October 11th or November 11th to give you a list of worries, would I have put uncertainties about corporate accounting and corporate governance and public policy in this area high up on that list? I don't think so."
"This has come upon us relatively quickly, very unexpected, inherently unpredictable, and I think everybody understands the tremendous importance of these issues, and I think there is substantial uncertainty about what is ... the best public policy response," Poole said.
CHUGGING ALONG
The St. Louis Fed chief said stock market weakness would likely make it harder for business to raise capital while at the same time making corporate executives leery about taking risks on new spending.
"That will probably slow down or push back the recovery of investment, but how much and how long is very uncertain," he said. It was a collapse in business investment that dragged the economy into recession last year.
Still, Poole, who does not have a vote on the Fed's interest-rate setting panel this year, said the consumers who account for two-thirds of economic activity and who kept up spending throughout last year's downturn were likely to keep "chugging."
"You have a little engine here that's strong and steady, maybe not flashy. It's not going to produce a high-speed result, but strong and steady and getting the job done." |
