16 January 2004, 09:22  Fed sees steady rates, gradual picking in jobs

CHERRY HILL, N.J., Jan 15 - U.S. employment will continue to improve gradually, but it will be some time before official interest rates need to start moving higher, senior Federal Reserve officials said on Thursday. In comments that reinforced the common Fed theme that it has no intention of lifting interest rates from 45-year lows for several months, despite strong economic growth, Philadelphia Fed President Anthony Santomero said policy changes are likely to occur "only slowly." Inflation is expected to remain stable and the labor market will take time to absorb the more than 2 million jobs that have been lost in the past three years.
"Under these circumstances, it would be appropriate for monetary policy to maintain its current accommodative stance," Santomero told the South Jersey Bankers Association. But he did warn that the Fed would need to start raising rates before inflation showed sustained increases. "We will need to begin the adjustment as we see signs that the economy is on a trajectory to achieve full employment or potential output, but before inflation actually accelerates," he said. In a separate appearance, Atlanta Fed President Jack Guynn also alluded to an eventual rise in rates. Guynn, a voting member on Fed policy this year, said fiscal and monetary policy should begin moving from steps to stimulate growth to a focus on the longer term. "The kind of (budget) deficits that we are seeing and are projected are not sustainable ... I think it's time for those (fiscal policy-making) folks to begin to shift and think longer term, just as we, I think, with monetary policy, have to begin to think longer term," he said.
Fed rates stand at a 45-year low of 1 percent. The central bank's policy committee has said it will be able to stay on hold for a "considerable period" without sparking inflation despite strong growth. Economists say that policy will have to change at some point, and some see a quarter-point rise in coming months. But Fed speakers in recent days have made it clear that the labor market is crucial to the outlook, and is still far below levels in keeping with a strong economy. Kansas City Fed President Thomas Hoenig, speaking in Broomfield, Colorado, said December payrolls, with a gain of just 1,000 new jobs versus expectations of 130,000, was disappointing. With unemployment at 5.7 percent, he said it would take an average of 200,000 to 300,000 new jobs a month over the year to take up the slack in the labor market. Hoenig is also a voting member on Fed policy this year, The fourth Fed speaker of the day, Dallas Fed President Robert McTeer, said he was optimistic that employment will improve.
"Employment growth has been disappointing recently, but it should pick up if the economy continues growing at anywhere near its recent pace," McTeer told the Gordon County Chamber of Commerce annual meeting in Calhoun, Georgia. Santomero, who is not a voting member on the Fed's policy committee this year, was more cautious. He said the labor market would "gradually" reach growth of 200,000 jobs a month this year and such "healthy" job growth would be slow in coming. "Yet, an acceleration in job growth is a crucial element to achieving a self-sustaining recovery," Santomero added. Economists say the giant U.S. economy must create at least 150,000 jobs a month just to keep pace with new entrants to the labor market.//

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