THE ECONOMY : Economic Growth Tapering Off, Fed Reports
Federal Reserve policy makers received a comforting report Wednesday indicating that economic growth continues to taper off in response to the central bank’s earlier tightening of credit aimed at slowing inflation.
The Fed report, prepared by the 12 district banks in the central bank system, concluded that most regions of the country are experiencing an “ebbing rate of expansion” and noted that “with some exceptions wage and price pressures are not accelerating.”
The Fed, which is scheduled to meet early in July to plan its next monetary policy moves, recently signaled a slight easing of its credit stance when it took steps to bring a 16-month-long increase in short-term interest rates to a halt. About two weeks ago, the Fed helped bring down the key federal funds rate, the interest rate banks charge each other on overnight loans, from roughly 9.75% to about 9.5%.
The Fed report, known as the “beige book,” provided further evidence that the rise in interest rates has taken its toll on certain sectors of the economy, such as autos and housing.
But the Fed report also found little evidence that the economy might be falling into a recession and Fed Gov. H. Robert Heller, who Wednesday announced his resignation, told reporters at a lunch that “indications of the onset of a recession are just not there.”
The report’s evidence of economic weakness should provide ammunition to those inside the Fed who want to continue easing credit. But as long as the economy continues to advance, many Fed officials are expected to argue that interest rates cannot fall much from current levels without running the risk of higher inflation. Given the differences of opinion inside the central bank, most analysts expect the Fed to leave credit policy pretty much where it is today.
Heller, who is leaving after three years on the board, said he sees no prospect of “a real flare-up in inflation,” adding that he is confident the underlying rate of inflation “will continue to drop.”
But outside analysts, while dismissing a handful of sharp jumps in monthly inflation figures as aberrations, noted that the basic inflation rate appears to be continuing to creep up from the 4% to 5% level of the last two years.
On other policy issues, Heller said he is not particularly worried that recent increases in the value of the dollar will prevent further shrinkage of the U.S. trade deficit. “The international adjustment process is proceeding,” he said, and “the current level (of the dollar) is not a level that stops that adjustment process.”
Heller attributed the dollar’s advance primarily to financial factors that make it more attractive for investors to put their money in dollar-denominated investments. Dismissing reports that some Bush Administration officials are disturbed by the failure of West German officials to help curb the rising dollar, Heller stated: “I don’t have a big problem with the Germans.”
The Fed’s beige book on current economic conditions found widespread evidence of a sluggish economy, but also noted that “although auto sales have dipped, reports of retail sales are generally positive.”
The long-depressed midsection of the country generally is continuing its economic rebound of the last couple of years, the report indicated, with the Cleveland, Kansas City, New York and Dallas district banks reporting rising demand among consumers. But Boston, Chicago and Philadelphia pointed to softening demand and employment gains in their regions.
The San Francisco regional bank, which covers the Pacific Coast, found that economic growth “continues to be healthy” but cautioned that most business leaders expect growth to weaken over the next year.
The survey of business on the West Coast found continued bottlenecks in the commercial aircraft industry, with officials complaining that “supplies are difficult to obtain, skilled labor is in short supply, . . . putting upward pressure on Seattle-area wages and on materials prices.”
By contrast, the report stated “cutbacks in defense spending are beginning to affect some California firms. One firm recently announced layoffs, and the competition for engineers reportedly has diminished.”
Despite indications that the Southern California real estate boom has ended, the report said: “California’s real estate markets continue strong. . . . However, relatively high interest rates reportedly have caused builders to become more cautious about commiting to new projects.”
