1 October 2002, 08:54  Federal Reserve Officials Say U.S. Growth Is Slow

By Michael McKee
Washington, Sept. 30 (Bloomberg) -- U.S. growth is slower than Federal Reserve officials anticipated and if it doesn't pick up, the central bank may lower interest rates for a 12th time, two Fed policy makers suggested.
``Demand is weak, growth is below potential,'' Dallas Federal Reserve Bank President Robert McTeer told the National Association for Business Economics. ``We need faster growth.''
McTeer was one of two members of the Fed's interest rate- setting Open Market Committee who voted against the committee's decision to maintain the benchmark overnight bank lending rate at 1.75 percent last week. Instead, McTeer and Fed Governor Edward Gramlich supported a rate cut.
McTeer declined to elaborate on his reasons, telling the economists they would have to wait for publication of the September Fed meeting minutes on Nov. 7.
New York Federal Reserve Bank President William McDonough, who voted with the majority, told an international bankers group it's ``likely'' the U.S. economy ``will do just fine.'' Still, ````The American central bank has shown an ability that should that not be the case, we know what to do,'' he said.
The Fed lowered the overnight rate 11 times between January and December last year, from 6.5 percent. The implied yield on fed funds futures for December fell to 1.4 percent, suggesting investors see a 100 percent chance the central bank will lower its target rate by 25 basis points at the Nov. 6 policy meeting.
With the overnight rate at a 41-year low, McDonough was asked if the Fed has room to lower it further. ``Of course we do,'' he said.
Chicago Factories
The Fed officials comments came shortly before the National Association of Purchasing Management-Chicago said its factory index fell to 48.1 this month. That was down from 54.9 in August and the first reading below 50 -- which indicates a contraction - - since January.
``We know that something's wrong with the economy'' because of anecdotal evidence such as airlines selling fewer tickets, hotels renting fewer rooms and retailers' sales slowing, McTeer said.
While the Chicago purchasing managers' employment index rose to 46.6 from 44.6 in August, the below-50 reading suggests companies aren't hiring, and McTeer said unemployment is likely to rise.
``We cannot continue to count on discouraged workers and declines in the labor force holding the unemployment rate down,'' he said.
Productivity has continued to increase during last year's recession and the slow recovery that's followed. That's good news for the economy and bad news for employment, he said.
``While recoveries fueled by productivity growth augur well for the economy over the long term, in the short term they put inordinate pressure on the unemployed and discouraged workers,'' because companies don't need as many employees, he said.
Another report from the Commerce Department today showed personal income rose a lower-than-expected 0.4 percent and spending rose a lower-than-expected 0.3 percent in August. Economists had expected both to rise 0.5 percent.
With demand weak, companies have no pricing power and the economy is experiencing disinflation, the Dallas Fed Bank president said. The consumer price index has risen 1.6 percent over the past 12 months, compared with a 3.4 percent index for the same period a year ago.
``I don't know at what point welcome disinflation might morph into unwelcome deflation,'' he said. ``I don't think we're there yet. We need faster growth, and a policy for faster growth is necessary to combat deflation.''
McDonough cautioned people shouldn't be excessively worried about the economy's prospects. ``The whole exercise of hand- wringing makes no sense,'' he said.

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