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Ny fed warns of risks to us economy Original Source Link: (May no longer be active)
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NY Fed Warns of Risks to U.S. Economy
Thu Mar 25, 2004 01:15 PM ET
By Pedro Nicolaci da Costa
NEW YORK (Reuters) - A ballooning U.S. budget deficit and low savings rate pose risks to the economy and the financial system, New York Federal Reserve President Timothy Geithner said on Thursday.
"The current deterioration in the U.S. fiscal position and the acute decline in the net national savings rate represent risks to the financial system and the economy as a whole," Geithner told the New York Bankers Association.
Geithner said such looming risks were made all the more worrying by the size of the U.S. current account deficit and the unprecedented scale of financing needed to fund it.
He also noted that U.S. inflation was very low and the outlook was for only very modest prices rises ahead. But he offered little in the way of hints on monetary policy in his first major speech since becoming New York Fed president.
That was hardly the case for his St. Louis counterpart, William Poole, who peppered his speech on Thursday with warnings about the need for an eventual hike in borrowing costs and sounded a stern warning on the prospect for inflation.
In the latest in a series of central bank speeches apparently laying the groundwork for an eventual policy shift, Poole reiterated suggestions from other policy-makers that rock-bottom rates could not coexist with strong economic growth for too long.
"We do have to watch the data carefully and make sure policy does not remain accommodative beyond its time," Poole told reporters before speaking at LeMoyne-Owen College in Memphis.
A lack of job creation and persistent low inflation have given the Fed plenty of leeway in keeping official interest rates at 1 percent, the lowest in 46 years.
But Poole surprised many by saying the risk of a renewed bout of inflation outweighed the prospect of a surprise decline in prices, in direct contradiction to the Fed's policy statement last week.
Since Poole is a voting member of the central bank's policy-making committee, his speech stoked speculation that the Fed may be one step closer to nudging interest rates higher.
That possibility seemed all the more plausible given a spike earlier on Thursday in the Fed's favorite inflation measure, the core personal consumption deflator.
A part of the government's gross domestic product report, a low core PCE was one reason the central bank could promise to be patient on raising rates.
Analysts were taken aback when the price measure was revised up to show a 1.2 percent rise from the original 0.7 percent gain in the fourth quarter, prompting investors to sell bonds.
GREENSPAN ON FARMS
Fed Chairman Alan Greenspan, who also took to the podium at a conference on Thursday, refrained from using any language that might hint at the future direction of interest rates.
Speaking about the farm sector, Greenspan said agricultural subsidies can make it more difficult for farmers to adapt to change, adding that open global markets are needed to ensure that consumers enjoy the benefits of productivity gains.
The Fed chief noted advances in farm productivity had brought wrenching changes over the years in the U.S. economy, as workers first migrated to manufacturing and more recently into service industries.
But he told the conference, sponsored by the Kansas City Fed and the Organization for Economic Cooperation and Development, that such "dislocations" were a worthwhile price to pay for the increases in living standards productivity brings.
Financial markets are awaiting an appearance from Fed Board Governor Donald Kohn for any further clues regarding the timing of an eventual interest rate hike from the central bank.
On Wednesday, two Fed officials warned investors that loose monetary policy conditions will not last forever, particularly in light of robust U.S. economic growth.
Job creation has been the missing component in the U.S. economic recovery, and until it picks up in breadth and speed, the Fed has suggested, borrowing costs are likely to remain on hold.
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