Fed Vice Chairman: Rate Cuts' Impact to Be Felt by 2002

THE HAGUE, The Netherlands – Federal Reserve Vice Chairman Roger Ferguson said on Thursday that he expected the impact of recent U.S. interest-rate cuts would be felt at the end of this year or the beginning of 2002.

``The Federal Reserve has acted very aggressively in adjusting interest rates,'' Ferguson told a videoconference audience at the U.S. Embassy in The Hague.

Ferguson said rate changes worked with a time lag.

``I would expect to see toward the end of this year or the beginning of next year the impact of that plus some other actions on the U.S. economy,'' he said.

The Fed has acted aggressively to counter a sharp deceleration in the world's richest economy, cutting interest rates five times by half a percentage point on each occasion to lower its key fed funds rate to a seven-year low of 4 percent.

Ferguson told the Senate Banking Committee on Wednesday that he did not believe the U.S. economy had hit bottom yet.

In his remarks on Thursday, the vice chairman repeated his confidence that the productivity gains seen in the United States in recent years will not necessarily fade even as the economy slows.

``Cyclical forces, such as the inability of businesses to add to their payrolls as rapidly as they would have liked in response to the rise in demand, probably played some role in these productivity gains,'' Ferguson said in the speech.

``However, I believe that the answer to the question is that most of the growth in productivity was structural, or trend, and not cyclical,'' he said.

The debate over whether the acceleration in productivity -- measured as output per hour of work -- is structural or simply an artifact of the United States' long economic expansion has major implications for policymakers.

Rising productivity can increase supply and allow for faster, noninflationary economic growth. But productivity posted its sharpest decline in eight years in the first quarter, an event that Ferguson on Wednesday said was ``not surprising,'' given the current slowing in the economy.

Still, Ferguson on Thursday said he was ``cautiously optimistic'' that most productivity improvements can be sustained, citing continued technological advances in high-tech equipment, as well as the fact that firms are continuing to try to use technology to substitute for labor.

``We should be mindful that even during the period between 1995 and 2000, productivity increases on a quarterly basis fluctuated; the trend increase that is so clear now did not progress unabated,'' he said.

Ferguson also said higher productivity not only affects the supply side of the economic equation, but that it also can boost demand.

Rising productivity causes increased capital investment by businesses, who may sense profit opportunities, and, through the stock market's anticipation of faster economic growth, increased consumer spending.

``Overall, the stock market, working through the spending decisions of both households and businesses, will act to bring forward the demand effects of the improved outlook for supply, potentially even pushing demand up ahead of the increase in supply,'' Ferguson said.