NEW YORK, Sept 4 - Federal Reserve officials said on Thursday that U.S. interest rates will remain at 45-year lows for some time, and even held out the possibility of another cut in rates if economic growth disappoints. But with the economy starting to fire up, they said the chances of another cut were small. And because inflation is expected to stay low, there will be no need to raise rates for some time either.
Fed Governor Ben Bernanke said the U.S. central bank had "no reason" to raise short-term interest rates so long as price pressures remained at bay. "In my view, the Federal Open Market Committee has little reason to undertake significant tightening so long as inflation remains low and promises to remain subdued, as it does today," Bernanke told a Bloomberg news agency panel in New York. Later, asked about the chances of another cut in the 1.00 percent federal funds rate, Bernanke said: "In my mind it's certainly possible, if the economy grows more slowly than we hope, if labor markets remain very soft, in which case more stimulus might be necessary." The commitment to keep rates low sparked solid gains in Treasury bond prices on Thursday, since bond investors in recent weeks have started to worry about rising interest rates. In Seattle, San Francisco Fed President Robert Parry said in the unlikely event that U.S. economic growth disappoints, the central bank could still cut interest rates. "If the economy were to underperform, we have room to cut rates," said Parry, a voting member of the Fed's policy committee. He stressed he thought this was unlikely.
Dallas Fed President Robert McTeer echoed the belief that further falls in inflation were more likely than inflation taking off. "The outlook for inflation seems very positive to me for some time to come, and therefore, I doubt that there will be a need to fight inflation for quite awhile," McTeer told the Dallas Chamber of Commerce.
THIS TIME IT'S REAL
The Fed officials came out in force to soothe market worries that the stronger economic growth underway would prompt the Fed to start jacking up interest rates from low levels. The show of unity was somewhat marred by St. Louis Fed chief William Poole who reiterated his view that rate policy by necessity must react to incoming information. "If we have a gangbuster recovery, if we got a huge recovery then there's going to be a surge in credit demand and it will be clear that the Fed will have to raise rates sooner rather than later," Poole told reporters after speaking to the St. Louis Financial Analysts Society. But Bernanke and Parry stressed, as Poole has in the past, that the current economic rebound differed from previous recoveries because inflation is so low. Though he has only been a Fed governor for a little over a year, Bernanke has often moved markets with his comments and has garnered more attention than many other Fed officials. Bernanke played down expectations priced into interest-rate futures markets that the Fed will start raising rates sharply in 2004. He said there was increased volatility in the futures market as a result of technical mortgage-related hedging, and such indicators were not as reliable as in the past. Fed funds futures are pricing in tightening of around 150 basis points in 2004, starting in April or May, more than most economists expect.
Some economists say the economy is on track to grow by around 5.0 percent in the third quarter, helped by robust consumer spending and a tentative revival in business investment. That would easily beat the 3.1 percent clip of the second quarter. Strong productivity growth and a high degree of economic slack means the Fed will likely not react to a pick-up in growth as it has in the past, Bernanke said. Bernanke said consensus estimates for economic growth were "broadly reasonable" and a long-awaited turn in business spending seemed at last to have arrived. Bernanke said the FOMC statement after its Aug. 12 meeting -- which said short-term rates were likely to stay low "for a considerable period" -- did not imply a set timeframe. Nor did it suggest an "increased tolerance for inflation", and at some point the Fed will need to act "forcefully" to keep inflation in check. The Fed last cut interest rates in June by a quarter-percentage point to 1.0 percent, and most economists expect that policy will be on hold until well into next year. During audience questions, the Fed governor conceded there had been a disconnect between the Fed and the bond market earlier this year.
At the time, bond prices spiked on the belief the Fed was considering unusual policy measures to fight deflation. Fed officials later doused those hopes. "Evidently there has been some miscommunication. It was unintentional ... Communicating accurately with the bond market is an important part of Fed policy and we will make every effort to make sure communication is effective in the future," Bernanke said.//