APPLETON, Wisc. – Chicago Federal Reserve President Michael Moskow said Wednesday that he expected the U.S. economy to keep growing, while warning that the path back to its potential growth rate could be rocky.
However, Moskow said: "The Fed cannot -- and should not -- try to smooth out every bump."
"On average, we expect GDP (gross domestic product) to increase over the next several quarters and growth eventually (to) run close to the economy's potential long-run rate -- which many analysts now put in the range of 3 to 3-1/2 percent," Moskow, not a voting member of the central bank's policymaking Federal Open Market Committee this year, told the Fox Valley Chamber of Commerce. "However, on a quarter-to-quarter basis, growth could be uneven."
Philadelphia Fed President Anthony Santomero, in remarks delivered in Reading, Pa. earlier on Wednesday, appeared to be on the same page as Moskow, saying he felt the current level of interest rates was "appropriate."
The policymaking FOMC last week opted to keep borrowing costs unchanged at four-decade lows, but shifted its balance of risks to say weakness was the greatest threat facing the economy today.
This left the door open for the central bank to add to the 11 interest rate cuts it made last year, but the FOMC signalled it was in no hurry to raise rates by saying the current level coupled with underlying growth in productivity -- or output per worker -- "should be sufficient" to foster growth.
One of the reasons for the uneven nature of the recovery is the revaluation of risk by corporate debt and equity markets in the wake of corporate accounting scandals like those involving Enron and WorldCom, Moskow said.
This has made it more expensive for businesses to borrow in the debt market and lowered the prices they can command through stock offerings, he added.
He said that while this revaluation of risk is a normal and correct response to the discovery that markets had perhaps not factored corporate misconduct into prices, "the concern, however, is that they may go overboard in this regard."
"If lower stock prices were maintained, the resulting dent in households' balance sheets would be a negative factor for future household spending," Moskow said.
The Chicago Fed chief said further adjustment in relatively lean U.S. inventories should provide a temporary lift for the economy, but that final demand -- a measure comprising business and consumer demand for goods and services -- needed to "gain a firmer footing" for a lasting and strong recovery.
So business spending must improve and consumer spending, a mainstay of the economy through the 2001 recession, needs to keep growing, he said.
Moskow said there was "reason to be optimistic" about productivity growth, which enables the economy to expand more quickly without creating dangerous price pressures.
"Inflation remains reasonably well contained," said Moskow, adding that this was another reason for optimism about the economy. He said that monetary and fiscal policy have helped support demand and described the current level of interest rates as "accommodative."
Moskow cited a number of reasons for caution about the outlook, including the excess capacity throughout the economy -- particularly in telecommunications.
"This excess capacity could be a drag on future investment. Orders for capital goods appear to have stabilized this past spring -- even in the high-tech sector," Moskow said.
"But capital spending clearly has a long way to go before the level of activity returns to where it was prior to the recession," he added.
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