DALLAS, July 23 - The Federal Reserve can keep interest rates low even if the U.S. economy strengthens appreciably without worrying any time soon that inflation will become troublesome, a top Fed official said on Wednesday. "I don't think there is going to be any great pressure to tighten when we start first seeing good growth," Dallas Federal Reserve Bank President Robert McTeer told a luncheon crowd. Speaking to the Dallas Rotary Club, McTeer also expressed optimism the economy would soon revive, even as he admitted a lack of "hard evidence" of a pickup.
The Dallas Fed chief, who participates in the central bank's debate on interest rates although he does not currently have a vote, said the economy could operate well above its usual speed limit for some time because so many Americans were out of work and much of industry was idle. "There's a lot of room for the economy to grow faster than its long-run potential for quite a while before that slack is used up and the threat of major inflation comes back," he said. Most analysts think growth around 3.5 percent is the most that can be sustained in the long run without pushing prices up.
McTeer repeated a view he laid out in a television interview on Tuesday: the economy could expand at least 5 percent a year for a couple of years, adding that such a robust pace of growth could be sustained "without having to worry at all about renewed inflation." "We're in a situation now where (the Fed is) more worried possibly about inflation going too low than about it going back up just a little bit," he said. Fed officials have said they expect growth to quicken, but have also voiced concern over the prospect for deflation. While they have said the risk of deflation is remote -- a view McTeer repeated on Wednesday -- they warn the economic toll could be high if it came to pass. The Fed has cut the benchmark overnight lending rate 13 times since early 2001, bringing it to a 45-year low of 1 percent, in an effort to breathe life into a sluggish economy.
WAITING, HOPING
Despite the Fed's aggressiveness, the economy has limped through the first half of the year. It grew 1.4 percent at the start of the year and economists expect an increase of about 1.5 percent when the government offers its first snapshot of second quarter growth next week. McTeer said, however, there were reasons to believe the economy was on the verge of accelerating. "I'm fairly optimistic that for the rest of this year it's going to pick up and next year it's going to be considerably stronger," he told the luncheon. Still, McTeer offered a note of caution on his forecast. "While I am optimistic that things are about to pick up, I have been optimistic like that for a while now and it's more a hunch and hope, and so forth, than it is any hard evidence so far," he said.
Speaking to reporters later, McTeer said the economy could "easily" expand at a solid 3 percent pace in the third quarter and even faster in the final months of the year, and that employment gains were likely only a few months away. He said one of the reasons for his optimism was that the Fed had been pursuing a low rate policy for a long time. "Monetary policy has been easy a long time," he said. "I've been quoted more than once in saying, it acts a little bit like vodka. You think it's not working, then it sneaks up on you." A fiscal swing from large surpluses to large deficits, in part due to recent tax cuts, should also help, he said. "I don't like deficits and I'd rather not have them over time, but if you're ever going to have one this is the time to have it," he said.//