Fed: Energy Could Spoil Economic Rebound

A sharp increase in energy prices could be the major obstacle for a turnaround in the U.S. economy, two Federal Reserve officials said on Friday.

In separate appearances, Richmond Fed President Alfred Broaddus and Chicago Fed President Michael Moskow cited increasing costs for gasoline, natural gas and electricity as potential spoilers for the U.S. economy as it tries to climb out of the doldrums.

``The overall economy will respond to energy prices,'' Moskow said after a speech at Valparaiso University. ``Energy prices are a risk to the outlook going forward. It's clearly one of the downside risks at this point.''

Broaddus said energy prices will be a ``complicating factor over the next several months.''

On the subject of gasoline costs in particular, he said higher prices at the pump are a ``very visible'' indicator of the economy for consumers and can put a damper on already declining levels of consumer confidence.

Fed officials keep a close eye on consumer confidence since it feeds directly into spending, which accounts for two-thirds of U.S. economic activity.

``Obviously sharply higher gasoline prices would not be a constructive development,'' Broaddus told reporters after speaking to the Retail Merchants Association in Richmond.

The average gasoline price at the pump rose to $1.626 a gallon, according to the government's latest weekly survey, 21 cents above year-ago levels and well above the $1.52 a gallon peak the department had forecast would be reached in June.


The Fed has cut interest rates four times this year, most recently on April 18, to boost the economy. So far it has cut short-term interest rates 2 percentage points to 4.5 percent.

The Fed next meets on May 15 when it is once again expected to cut interest rates. Twenty-four out of 25 primary dealers expect the central bank to cut its key rate by 0.5 percentage point at that meeting, according to a Reuters poll on Friday.

Moskow is a voting member on the Fed's policymaking committee this year while Broaddus is not, following the usual voting rotation of Fed presidents.

Moskow said there had been mounting signs of economic deterioration ahead of the surprise cut this month. When asked if the Fed had any insights into the employment situation at that time, the Chicago Fed chief said the central bank based its view of the labor market on weekly claims for unemployment benefits -- a number that had been trending higher.

Moskow and Broaddus spoke shortly after the government reported new information about the job market. The Labor Department said U.S. payrolls excluding the farming sector fell 223,000 in April, while the unemployment rate rose to 4.5 percent from 4.3 percent in March.

Broaddus told reporters that he had not seen the report, but said, ``I think many people had anticipated there would be possibly some increase in the unemployment rate so I don't this will be a complete surprise.''

`` Satisfactory''

The economy slowed last year, falling to a 1 percent annual growth rate in the fourth quarter, half the third quarter's pace and way off the second quarter's 5.6 percent. Growth rose to 2 percent in the first quarter of 2001, a welcome increase but still below the economy's potential.

Moskow and Broaddus cited several factors working in the economy's favor going forward, including an increase in commercial and residential housing construction as well as a quick decline in inventories at firms across the nation.

The Chicago Fed chief predicted the economy would rebound gradually this year ``to more satisfactory levels'' but noted that the economic outlook was more uncertain than usual.

His counterpart at the Richmond Fed declined to give a forecast for the economy.

In addition to energy prices, Broaddus cited high levels of consumer debt as a potential risk for the economy.

``It is a matter of some concern,'' Broaddus said. ``It's not a deal-breaker, so to speak, but it is a complicating factor.''

Consumers went on a spending spree during the record economic expansion that recently marked its 10th anniversary. Personal consumption outlays jumped more than 75 percent from 1991 to $7 trillion in 2000, according to government data.

At the same time, outstanding consumer credit about doubled, from $788 billion in March 1991 to $1.5 trillion in December 2000, according to the Federal Reserve.