By Steven K. Beckner
WASHINGTON (MktNews) - St. Louis Federal Reserve Bank President William Poole Thursday said he believes the Blue Chip forecast of 2.1% growth in 2001 to be "reasonable" and "very heartening."
Poole, a voting member of the Fed's policymaking Federal Open Market Committee, qualified his comments by saying it is difficult for the Fed (or anyone else) to make reliable forecast given the uncertainties surrounding tax cuts and the California electrical utility crisis. And he said it is difficult to predict the impact of lower stock prices, the "mild depreciation" of the dollar against the euro or the weakening of the Japanese economy.
Poole, in remarks prepared for the Economic and Business Club of Little Rock, spoke optimistically about the inflation outlook, pointing to futures market indications of lower future energy prices and the continued lack of business "pricing power."
Referring to the 2.1% growth projection most recently published in the "Blue Chip" newsletter's collation of economic forecasts, Poole said "I think that forecast is reasonable." He cautioned that such forecasts have a wide margin of error so that the forecast range should be 1% to 3%.
By comparison, the "central tendency" forecast of Federal Reserve Bank presidents and governors announced Tuesday was 2% to 2.5%. Poole described that forecast as being "in the mainstream of professional forecasters in general."
Poole further cautioned that "in current circumstances, we are being asked to offer a forecast even though we do not know what the nature of possible tax legislation will be, what events might occur abroad, what the resolution of the California electricity situation will be, and so forth."
Further, Poole said, "we do not have solid predictions of the likely effects of the decline in the stock market after last March, or of the mild depreciation of the dollar against the euro in recent months, or of the apparent downturn in the Japanese economy."
Nevertheless, Poole said the outlook for roughly 2% growth "should be regarded as very heartening" and noted that "forecasters believe that the economy's slower first half will be followed by growth that is more or less consistent with the economy's estimated long-term growth potential."
Poole did not say that the Fed now regards the economy's noninflationary growth potential as close to 4%, but noted that productivity growth has accelerated. Although productivity growth is still subject to "considerable uncertainty," he said "every passing year brings additional convincing evidence that U.S. productivity growth is now measurably higher than it was in the 1970s and 1980s."
To the extent he regards forecasts as "reasonable," Poole's remarks seem to suggest that he would expect growth close to 4% in the second half.
Poole said the Fed's most important objective, in his view, is keeping inflation under control, and he said "Fed policy has been extremely successful in recent years in maintaining confidence that the rate of inflation will remain low and stable over a period of years." In that environment, he said "market interest rates respond sensitively to current conditions and do much of the stabilization work."
Looking ahead, Poole observed that "in energy markets, futures prices indicate that the best guess is that energy prices will be trending lower over the next several years." And he said "firms believe they have very little pricing power."
"Data on inflation expectations over the longer run indicates that households and firms continue to believe that inflation will remain in the range of recent years."
Poole said the Fed "cannot be locked into a given path" for the federal funds rate and said "no policy actions are ever 'baked into the cake' long in advance of FOMC meetings."