Nov. 13 (Bloomberg) -- The U.S. economy needs to grow faster than economists predict to absorb the workers and capital idled by three years of slow growth, Federal Reserve Bank of St. Louis President William Poole said. The Fed may have room to keep rates low ``well beyond March,'' he said. ``The standard forecast is still for good but by no means gangbusters growth,'' said Poole, a voter on the Federal Open Market Committee next year, in an interview. ``That means we are only going to make very slow gains in reducing unemployment.'' Chairman Alan Greenspan and other FOMC members have said rising productivity means the economy can grow faster than they once thought without stoking inflation. The sustainable growth rate has risen from 3.5 percent to about 4.5 percent, Poole said, meaning the economy must grow faster than that to reduce unemployment. The economy will grow just 4.1 percent next year, based on the median forecast in a Bloomberg News economist poll.
Trading in fed funds futures contracts show investors place a better than 50 percent chance that by April the Fed will begin raising its benchmark overnight lending rate, which has been at a 45-year low of 1 percent since June. Economists polled by Bloomberg expect an increase by next year's third quarter. As for a low-rate environment, ``If we have modest growth, as expected -- with no imbalances, very orderly with no inflation pressures -- that environment could extend well beyond March,'' said Poole, who declined to predict when the Fed might make its next move. ``Policy is conditioned by the evidence that stares us in the face, not on the calendar.''
Possible `Upside Surprise'
The unemployment rate, now at 6 percent, could fall below 5 percent without causing inflation worries, Poole said. The comments show that even one of the Fed's most aggressive inflation fighters is convinced the economy has room to grow without forcing rates higher. Earlier this year JP Morgan Securities Inc. dubbed Poole as the Fed's second-most ``hawkish'' member. The phrase refers to someone likely to seek higher rates at early signs of an inflation threat. The economy may offer ``a very pleasant upside surprise'' in the year ahead, Poole said in the St. Louis Fed's 1925 board room, so newly renovated that he wouldn't even set down his glass, in case it left a water ring before directors saw the new table. ``There's lots of evidence that the pace is picking up. I don't think we're likely to see the economy return to its soft state of the last couple years.'' The economy grew 7.2 percent at an annual rate in the third quarter and has added more than a quarter million jobs in three months. Other positive signs include low inventory levels and rising business investment, he said.
Dissenting Votes
Fed policy makers have said they expected to keep rates low ``for a considerable period'' to spur more job creation. The unemployment rate was 6 percent in October, 2 percentage points higher than in November 2000. Poole has voted against Fed interest rate actions once in each of his two previous years as a voter on the FOMC; both times he voted for tighter monetary policy. He is a former student of Nobel Prize-winning economist Milton Friedman, father of a school of monetarist thought which holds that central bankers contribute to inflation by keeping rates too low and letting the money supply grow too quickly. In the JP Morgan report earlier this year, only Kansas City Federal Reserve Bank President Thomas Hoenig was considered a more aggressive inflation fighter. ``Hawks need not be pessimists,'' Poole said. ``Now that we have inflation down to the neighborhood of price stability, that maximizes our opportunity for the highest possible sustained growth over the long run.'' Growth ``in the 5 percent range'' could continue for a couple years ``without being unsustainable,'' he said.
Increased Tolerance
Poole's newfound tolerance for faster growth puts his estimate of the economy's potential growth rate in line with, or a little above, estimates by colleague Robert McTeer, the Dallas Fed president who calls his bank ``the New Economy Fed.'' McTeer dissented three times in his past two years as an FOMC voter, always in favor of lower rates or easier policy. The Fed's seven governors in Washington are permanent voters on the FOMC, along with the president of the New York Fed. The other 11 regional Fed presidents get to vote every second or third year, for a total of 12 voters at any one time. Rising productivity has convinced Poole that the economy's speed limit is rising. Productivity, a measure of how much an employee produces for every hour of work, rose at an 8.1 percent annual rate from July through September, the most since the first three months of 2002, the Labor Department said. That compares with a revised 7 percent gain in the second quarter.
`Extraordinary Productivity'
``Productivity gains have been extraordinary,'' Poole said. ``Back when we got the second quarter numbers, I described them as stunning, and now we've got the third quarter numbers and I don't know what word to use.'' Greenspan is credited with recognizing that trend in the late 1990s and letting the economy grow faster than economists previously thought possible, raising living standards and lowering joblessness in the U.S. From 1996 to 2000, productivity gains averaged 2.5 percent a year. That compares with the 1976- 1995 average of 1.4 percent. Productivity may still be on the rise, Poole said. ``My own thinking has ratcheted up the productivity guess,'' Poole said. ``Something in the neighborhood of 3 or 3 1/2 percent productivity growth is a very reasonable bet,'' adding ``I would not rule out something higher than that.'' Poole said he hasn't gone soft on inflation. ``I will be hawkish on policy decisions to make sure that we maintain this inflation environment,'' he said. ``We need to be prepared to act when we see risks to price stability.''
Economy `Underutilized'
For now, inflation is ``quite low'' and ``in the range of price stability,'' he said. ``The evidence from market surveys and the spreads between conventional and inflation indexed bonds suggests that the market sees it remaining about where it is for some time.'' The consumer price index, excluding volatile food and energy prices, have risen 1.2 percent over the past year, matching the lowest gain since February 1966. ``I don't think there's any doubt that the economy is underutilized now,'' Poole said. ``The long run prospects are excellent, so in due time we are going to absorb the people who are currently unemployed,'' Poole said. ``What I can't tell you is how far that is going to go over the next four quarters.'' //www.bloomberg.com