Two Federal Reserve officials gave further warning to investors on Wednesday that loose monetary policy won't continue forever given rising U.S. economic growth. A third Fed official joined them in reiterating the central bank's overall stand on monetary policy by emphasizing continued patience in raising interest rates in view of sluggish job growth and tame inflation, despite the robust economic data. Job creation has been the missing component in the U.S. economic recovery, and until it picks up in breadth and speed, borrowing costs are likely to remain at 1 percent, their lowest level in 46 years. The Fed said as much after leaving its benchmark rate unchanged at last week's Federal Open Market Committee (FOMC) meeting where monetary policy is decided. "With a continuing solid pace of growth, this level of monetary accommodation could at some point become incompatible with the core objectives of the bank," said Boston Federal Reserve Bank President Cathy Minehan in a speech to the Money Marketeers of New York University.
"Thus, I would argue that while patience is a virtue, so too is vigilance," she added. Minehan is currently a voting member of the FOMC. A final reading of fourth-quarter 2003 gross domestic product, due on Thursday at 8:30 a.m. EST (1330 GMT), is expected to be up 4.1 percent, unchanged from preliminary estimates. In a separate appearance, Atlanta Fed President Jack Guynn issued a hawkish warning, similar to one he made earlier this month, that as growth picks up, these historically low U.S. borrowing costs will head higher. "The Fed has good reason to maintain its accommodative policy, at least for now. But if my forecast for more robust economic growth materializes, than at some point a Fed funds rate of 1 percent will no longer be the best policy," Guynn said in a speech delivered in Johnson City, Tennessee. Guynn currently does not have a vote on the FOMC The latest poll of Wall Street economists found a majority expect no move in rates in the next six months, and 10 out of 20 polled see no change until 2005.
"I think we can be patient -- patient, that's what we said -- in the degree of accommodation that we have," Federal Reserve Bank of San Francisco President Robert Parry told journalists after a panel discussion with chief executives in Portland, Oregon.
HIGH PRODUCTIVITY, TAME INFLATION BUT NO JOBS
"Overall, just about everything seems to be coming up roses -- except for jobs. No matter how you measure it, job creation has been anemic," Minehan said. She added that if demand for goods and services continues to rise, job growth will follow. Minehan said she did not believe the movement of jobs outside the united states was the main reason for weak job growth. She pointed instead to "staggering" gains in productivity, rising labor costs and businesses feeling uncertain about the future. "Offshoring is likely to continue. But does it bear a lot of the blame for our current weak job growth? The available data suggest that the answer is no," Minehan said. The Fed officials were unanimous in their view that inflation is not a problem at the moment, but must be closely monitored. Parry, who is not a voting member of the FOMC this year, said recent increases in energy prices would send a "troubling" signal on inflation if they were sustained. But thus far, Parry said, he saw little sign that the indexes of underlying inflation, on which the Fed focuses, were likely to rise in the foreseeable future. Parry said he expected strong economic growth to lead to monthly payroll gains of 100,000 to 200,000 a month later this year, but even then, the economy's excess production and employment capacity should keep inflation down.///www..com