WRAPUP 1-U.S. economy still on track, inflation benign, Fed says
Wed Oct 6, 2004 06:34 PM ET
By Alister Bull
WASHINGTON, Oct 6 (Reuters) - U.S. economic expansion remains on track and inflation under control, a senior Federal Reserve official said on Wednesday, while another top policy- maker warned that U.S. savings rates would likely remain weak.
"I think we're in a pretty solid situation and can look forward to a good long business expansion, provided we don't have any more unforeseen shocks," St. Louis Federal Reserve Bank President William Poole said.
"The US economy, the best we can forecast it, there's expected real growth proceeding at the rate of (a) 3-1/2 to four percent track and unemployment will be gradually coming down," he told reporters after a speech in Springfield, Missouri.
The country's economy stuttered during the second quarter amid record oil prices but the Fed has said that momentum has been restored, underpinning forecasts it will raise interest rates another quarter point before the end of 2004.
But Poole, a voting member of the Fed's policy committee this year, noted its recent statements that policy would be tightened at a measured pace should not be taken as an "ironclad" commitment to mechanically move every meeting.
"It is possible -- I would argue likely at some point -- that new information will cause the FOMC to adjust the target at a pace different from what is currently anticipated."
"The pace could be faster or slower, depending on how the economy evolves," he told the Ozark Chapter of the Society of Financial Service Professionals added.
The Federal Open Market Committee meets again this year on Nov. 10 and Dec. 14.
HOW HIGH?
The Fed has upped its benchmark funds target rate by a quarter percentage point three times this year to 1.75 percent and markets expect to see 2.0 percent by the year's end.
Analysts are divided on how much further the Fed will go, with some seeing it taking a long pause at two percent to ensure economic expansion is not derailed by high oil prices. But Poole cautioned this would be determined by events.
"Where the funds rate has to go is going to depend on the circumstances. Three to 5 (percent) might be informative in the sense of a long-run average. It should not be read as saying clearly the Fed is going to stop when we get there because the conditions might force us, or require for equilibrium, that we be above or below that point," he said.
In separate comments on Wednesday, Fed Vice Chairman Roger Ferguson avoided direct reference to the economic outlook but made plain the long-term problems associated with the country's low rate of household savings would not be swiftly remedied.
"All told I would not expect the personal saving rate to return in the near term to the peaks seen twenty years ago, and I would be surprised even by a return any time soon to the average rate that prevailed between the 1950s and the 1980s," Ferguson said in remarks to bankers in Nashville, Tennessee.
U.S. households save less than one percent of disposable income but remain avid consumers, contributing to a yawning trade deficit as imports outstrip exports and a current account funding gap of 5 percent of GDP which many deem unsustainable.
But Ferguson said all was not doom and gloom and noted there was even a silver lining to the aging population.
"At the same time, I want to note that we likely will not need so high a national saving rate in the future because, as the growth rate of the labor force slows with the retirement of the baby boom generation, less investment will be required to equip each worker with the same amount of capital."
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City and another policy committee voter this year, is scheduled to speak on the economy at 8:45 pm EDT/0045 GMT. (Additional reporting by Jonathan Nicholson in Washington and Karen Culp in Springfield, Mo.)
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