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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: Real Man who wrote (61802)	12/20/2002 10:11:02 AM
From: stockman_scott	Read Replies (1) \| Respond to of 94695

UPDATE 1-Poole-Fed must be wary of deflation and inflation -- (Adds details, background) ST. LOUIS, Dec 20 (Reuters) - William Poole, president of the Federal Reserve Bank of St. Louis, said on Friday the U.S. central bank must be on watch against its traditional worry of inflation and also of deflation, a broad drop in prices. "The Fed needs to be alert to deflationary as well as inflationary dangers in the months ahead," he said in prepared remarks to be delivered to a management conference. "If necessary, there is room to cut the federal funds target rate some more, and to pursue other policies if we run out of room on the funds rate policy instrument. I think it is unlikely that we'll run into that problem, but thinking through every possible contingency is what creates a robust and competent monetary policy," he said. The Fed cut short-term interest rates by a hefty half-percentage point in November but held back on any further action at a meeting earlier this month. The rate cut brought the benchmark rate to a new four-decade low. While Poole called the Fed's policy "very accommodative," he also said, "Given the downward pressures that have slowed the economy's recovery, this stance has been appropriate." Poole said the inflation-fighting credibility the Fed built up in recent years has allowed it the freedom to move rates as needed. "The markets believe that the Fed will reverse course when necessary to prevent inflation from rising, and I'll certainly do everything I know to do to assure that outcome," he said. Poole is not a voting member of the Federal Open Market Committee, the central bank's monetary policy-setting panel, this year. Looking ahead to the economy's performance in 2003 and 2004, Poole said it was likely that consumption growth, the main driver of the U.S. economy, will remain around 3 percent. The outlook for overall growth in gross domestic product will "depend crucially" on firms' willingness to spend on capital goods, he said. Poole cited a litany of factors currently holding back such spending: low rates of capacity in use; high vacancy rates in commercial and industrial buildings; a guarded outlook for profits; and uncertainties associated with a possible war with Iraq or the threat of future terrorist attacks. Still, he said high-tech capital in particular depreciates rapidly, and "business planning becomes appreciably less challenging once geopolitical uncertainties are resolved." Poole said the continued rapid growth in productivity, or output per worker hour, helped soften the recession in 2001 but has also been a drag on job growth in the ensuing recovery. He said productivity growth has averaged about 1 percentage point faster in 2002 than in previous recoveries. "A crude back-of-the-envelope calculation shows that this extra one-percentage point of labor productivity growth over the first three quarters of 2002 has effectively been substituted for a net job creation of a little more than two million workers, which would have occurred had the average job growth of the past four recoveries held," he said. Assuming the economic recovery began in late 2001 or early 2002, Poole said it would qualify as "one of the slowest economic recoveries" in the post-World War Two period. "Most fundamentally, the modest recovery reflects the modest nature of the recession of 2001," he said. ((Reporting by Jonathan Nicholson; Reuters messaging: jonathan.nicholson.reuters.com@reuters.net; 202-898-8395; e-mail: jonathan.nicholson@reuters.com)) (C) Reuters 2002. All rights reserved.