29 October 2002, 09:32  Fed's Moskow Says Low Rates to Help Economy Grow

/www.bloomberg.com/ By Carlos Torres and Andrew Ward
Fed's Moskow Says Low Rates to Help Economy Grow (Correct)
(Corrects quotation in sixth paragraph to add the dropped word ``we.'')
Chicago, Oct. 28 (Bloomberg) -- Tame inflation, lean inventories, rising incomes, and low interest rates will help keep the economy growing in coming months, said Michael Moskow, president of the Federal Reserve Bank of Chicago.
``A moderate economic expansion will continue,'' Moskow said in a speech to the Horwath International Partners Summit.
``Inflation remains low and well contained,'' Moskow, a non- voting member of the policy-making Fed Open Market Committee said, echoing a speech he made last week. ``This has allowed monetary policy to maintain an accommodative stance for an extended period of time'' and ``bolsters demand throughout the economy.''
At the same time, ``the economy is facing many challenges,'' Moskow said. These include a glut of capacity that suggests spending on new factories and equipment ``may take some time'' before returning to levels seen before the recession, he said.
U.S. preparations for military action against Iraq are adding to investors' concerns and pushing stocks lower, he said.
``Adding the geopolitical situation to the shock of the accounting and corporate governance failures, both so soon after last year's downturn and 9/11, we come up with an economy that is dealing with a substantial amount of uncertainty,'' Moskow said. ``And such uncertainty can inhibit activity.''
Increased business spending is necessary ``in order for the recovery to get traction,'' Moskow told reporters after the speech.
Interest Rates
On Sept. 24, the Fed held the benchmark overnight bank lending rate at a 41-year low of 1.75 percent. Central bankers next meet on Nov. 6.
The implied yield on the federal funds futures contract for December, which is tied to the overnight rate, fell 5 basis points to 1.52 percent today. A basis point is 0.01 percentage point. That shows expectations of a rate cut are rising because the recovery isn't gaining strength.
The latest Blue Chip Economic Indicators survey, released earlier this month, showed the economy may expand at a slower pace through mid-2003 than projected just a month earlier, as a slide in stock prices damps consumer and business spending.
The outlook suggests ``the economy is currently experiencing a soft spot,'' Moskow said.
Growth will slow to a 2.2 percent annual rate in the final three months of this year, 0.7 percentage point less than expected a month ago, according to the consensus estimate of 51 economists in the survey. The 3.1 percent growth pace expected for the first quarter of next year is lower than the September forecast of 3.4 percent.
Consumer Debt
Rising consumer debt levels aren't a risk to the economy, Moskow said. While some may be concerned that debt is rising as a percentage of income, the rate of delinquency on loans paints a ``mixed picture,'' he said during a question and answer period following the speech. The rate of delinquencies on auto and home loans is low, while credit card defaults are up, he said.
As you look at delinquency data, ``there doesn't at this point appear to be any cause for alarm,'' said Moskow.
Balance sheets at financial institutions are also in good shape, Moskow said. Banks earnings are doing well even as non- performing loans show small ``upticks,'' he said.
``I think that banks prepared better this time than in previous cases,'' Moskow said.

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