Fed Officials Warn on Trade, New Jobs Data

Top Federal Reserve (search) policy-makers generally agreed on Thursday that U.S. economy was growing nicely despite weak job growth and spiraling trade gaps.

Federal Reserve Vice Chairman Roger Ferguson singled out the current account deficit as a risk for expansion, particularly if it ends up in a wrenching adjustment that strains ordinary Americans and spills over to other countries.

Separately in Cincinnati, the president of the Cleveland Federal Reserve Bank, Sandra Pianalto, said it was hard to say whether sluggish job growth will ever revive to levels that normally are associated with a recovery.

Ferguson cautioned against turning to protectionist measures to counter the U.S. trade shortfall, noting that would be exactly the wrong prescription for long-term growth.

Government data show the U.S. current account — the broadest measure of trade and investment flows between the United States and its trade partners — hit a record $166 billion in the second quarter, a level that European allies regularly criticize as dangerously high.

"We cannot foresee when the deficit will stop growing and return to more sustainable levels, through what mechanisms this adjustment will occur, or whether this adjustment will be smooth or disruptive for financial markets and the economy more generally," Ferguson told a conference sponsored by the Cato Institute and Economist magazine.

"No matter how a correction of the external imbalance proceeds, however, it will involve a range of adjustments to investment, saving, and asset prices, both for the U.S. economy and for our trading partners," he said.

Even so, he urged a continued drive to push down barriers to trade. "It is crucial to maintain public pressure for free trade," Ferguson said.

Pianalto said U.S. job growth has been the weakest in decades and it was hard to say if and when a substantial pickup can be expected because reasons for it are hard to pinpoint.

"I honestly do not know how much of our current, slower-than-expected job performance is transitory — tied to businesses' reluctance to hire, or lagging confidence, or any number of roadblocks that will quickly be removed with an economy — and how much is a longer-term consequence of economic transformation," Pianalto said.

Neither Ferguson nor Pianalto offered much guidance on future interest-rate rises, and whether more are imminent on top of the three 0.25 percentage point hikes this year, which have taken the Fed's bellwether federal funds rate to 1.75 percent.

Pianalto said future interest-rate moves by the U.S. central bank would depend on how the economy evolves. A key sounding on that comes on Friday, when the Labor Department (search) issues its September employment report.

Wall Street has forecast 148,000 jobs were added — barely enough to absorb new labor-market entrants.

But on Thursday, even Treasury Secretary John Snow was playing down expectations, saying during an election-campaign visit to Missouri that "it wouldn't surprise me" if hurricanes that swept through the Southeast in recent weeks swamped job growth.

A welter of Fed speakers were out across the country on Thursday, speaking on a wide variety of subjects with little evident coordination among their themes.

In New York, Fed Governor Ben Bernanke (search) told the Japan Society there has been a "striking" drop in U.S. long-term interest rates since Fed policy-makers started to jack short-term rates up from 46-year lows in June.

Generally, it would be expected that bond rates also would move up, rather than decline as they have.

Bernanke said it may stem from reduced fear of inflation, but it might be worry that economic prospects are not as rosy as hoped.

"Since June ... inflation fears have receded, and some financial market participants have become less optimistic about the economy's near-term growth prospects," he said, so they may expect the Fed's policy-etting Federal Open Market Committee to back off on the pace of interest-rate hikes.

The FOMC has two more policy sessions left this year, on Nov. 10 and Dec. 14, and is widely expected to raise rates at least one more time.

"Because of these changes in their outlook, market participants now expect the FOMC to proceed more slowly in its tightening than they did in June," Bernanke said.