6 June 2001, 09:25  Fed's Broaddus/U.S. economy -- 2 (tax cuts to have positive impact)

Broaddus said the eleven-year, 1.35 trln usd tax cut to be enacted tomorrow by President George Bush will have a "positive impact" on the U.S. economy, if they become permanent.
A large portion of the tax cut is composed of reductions in marginal income tax rates, which "are good for the economy in the long run, if they are made permanent" he said.
"I would expect there to be a positive impact," he said.
The legislation set to be enacted by Bush tomorrow would end in 2011 unless Congress renews it, under Senate rules for tax cut bills. Asked by conference participants about the outlook for productivity growth, after the Labor Department reported earlier a revised 1.2 pct decline in labor productivity during the first quarter, Broaddus suggested the drop was a cyclical, not structural, one.
"Productivity growth has a strong cyclical trend," he explained, as it rises when GDP rises, and decelerates when GDP growth slows. With a pickup in output, "you would expect to see actual, measured productivity begin to rise again," he said.
This should in turn help to "contain inflation risks from that point," he added.
Broaddus separately warned that the declining supply of U.S. Treasury securities could have a negative impact on the Fed's ability to conduct monetary policy.
He noted a study he authored on the subject, due to be published shortly by the Richmond Fed, which proposes that the Treasury Department work with the Fed to ensure enough supply of Treasury securities for the Fed to continue to use such debt in conducting its monetary policy. The study proposes "that a way be found for the Federal Reserve and Treasury to arrange for the issuance of enough Treasury debt so that we can continue to conduct our monetary policy operations exclusively with Treasury debt," he said.
If the Fed were forced to use other debt in its monetary policy, it would be making decisions about the allocation of credit, he explained, which is more a province of fiscal policy.
Separately, Broaddus said stronger growth in Europe would be helpful in cushioning the slowing U.S. economy.
European economies "are not growing as fast as had been anticipated earlier," he said, noting that "obviously when we have a slowdown in the U.S., to the extent that growth there were more rapid, that might help cushion our own economic slowdown."
The Richmond Fed Bank president would not comment on monetary policy in Europe.
Regarding Japan, Broaddus said he supports the new government's plans to implement banking-sector reforms, as "meaningful progress" towards resolving the country's banking and financial sector problems "would be a positive step."

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