WASHINGTON, Sept 23 - The U.S. economy is poised for solid growth, two top Federal Reserve officials said on Tuesday, although one warned that the recovery's inability to create jobs posed a risk to the outlook. "There is every reason to expect this expansion that we've got going now will get stronger," Dallas Federal Reserve Bank President Robert McTeer said at a luncheon sponsored by the Rotary Club of Honolulu. "Hopefully before long it will be strong enough to start cutting into the unemployment rate."
Separately, Richmond Fed chief Alfred Broaddus told a meeting of the Southern Governors' Association in Charleston, West Virginia, that consensus forecasts for a solid 4 percent economic expansion next year seemed the most likely outcome. However, Broaddus struck a more downbeat tone than his colleague McTeer by stressing that the U.S. economy was not necessarily out of the woods. "I think the consensus projection is the most likely outcome but a weaker performance cannot be ruled out as long as job conditions are soft," Broaddus said. "By far the biggest downside risk ... is the current weak jobs market and the prospect, the possibility that it will remain weak in the months ahead," he added, saying such an outcome could undercut consumer spending.
The U.S. economy shed 93,000 jobs in August, the seventh straight month of declining employment. Broaddus also warned of the potential for an unwanted downward drift in already-low inflation, reinforcing a message delivered a day earlier in a speech by Fed Governor Ben Bernanke and underscoring the Fed's belief that interest rates can kept down for a considerable period. At their last meeting on Sept. 16, Fed officials held overnight interest rates steady at a 45-year low of 1 percent as they repeated a caution over a minor risk that inflation could move "undesirably" low. Fed officials are concerned they could face a hard time boosting the economy in the event of an unforeseen shock, such as a terror attack, if inflation were too low. The Richmond Fed chief has a vote this year on the Fed's policy-making panel, while McTeer does not.
PRODUCTIVITY AND DISINFLATION
Broaddus said he saw a risk the longer-term trend of growth in productivity, or worker output per hour, could accelerate, making it tougher to lower the unemployment rate and reduce excess industrial capacity. That, he warned, could lay the groundwork for an unwanted disinflation. Accelerating productivity, or worker output per hour, allows businesses to raise output without hiring new workers. For his part, McTeer emphasized the positive. He said surging productivity would benefit Americans in the long run by increasing standards of living, even as he admitted it was causing short-term pain. "In the short run this good news of rapid productivity growth has turned into bad news as far as employment is concerned," he said. "I don't consider that a real big problem. It just means that we've got to grow faster now than we used to."
The Dallas Fed chief cited a number of reasons for his optimism on the economic outlook: the Fed's low-interest rate policy, "very stimulative" tax cuts, a rising stock market, lower risk spreads on corporate debt and a weaker dollar. "Strong dollars help your standard of living and help consumers, weaker dollars help your producers and exporters. It had been strong a long time, so probably that relief is not a bad thing," he said, without making clear whether he was referring to a sharp slide in the dollar's value in the past two days. While Broaddus warned on disinflation risks, he expressed confidence the Fed could sustain what he termed the current period of price stability and steer clear of deflation, an outright decline in the overall level of consumer prices that could hamstring the economy. "It does not imply that further disinflation is a certainty, that it's inevitable or that the Fed is not able to address it effectively with monetary policy," Broaddus said of his warning. "I think the risk that we will fall into actual deflation is quite small, not nonexistent, but quite small," he said. "It's important to understand that if we did, the Fed is fully capable of dealing with it."//