Fed Gov. Says Central Bank Is Prepared to Act

The central bank will try to cushion a coming economic slowdown, Federal Reserve Gov. Laurence Meyer said Monday, addressing growing fears that the global financial wildfire is intensifying.

Fed policymakers decided last week to cut short-term interest rates for the first time in nearly three years, signaling that the Fed was prepared to act to offset clearly rising risks, Meyer told the National Assn. for Business Economics.

Without specifying that the Fed stood ready to cut interest rates further, Meyer noted that an NABE forecast of “benign slowdown” in U.S. expansion, to 2.2% in 1999 from 3.4% this year, assumed the Fed would do its best to sustain growth.

“The preemptive policy move last week can, in my view, be understood as the implementation of such a flexible policy,” Meyer said while offering the most detailed explanation yet for the Fed’s Sept. 29 decision to trim the federal funds rate a quarter-point to 5.25%.

At the same time, there isn’t “clear evidence of a slowing in the expansion in the most recent data,” he said, suggesting he won’t advocate further Fed rate reductions until strong signs of economic weakness develop.

Recent reports on the auto industry and the economy back Meyer’s view that signs of a slowdown are difficult to discern. The NABE’s survey found expectations that the economy will expand 2.2% next year, slower than the 3.4% growth expected for this year, though nowhere near recession. The National Assn. of Purchasing Management said its non-factory index rose in September for the first time in four months.

Still, falling stocks, weakening consumer sentiment and slowing job growth provide a counterpoint. Last week’s report on job growth for September showed the weakest performance in 2 1/2 years, as U.S. companies added just 69,000 workers and the unemployment rate rose to a six-month high.

Meyer cited a series of factors that will slow the U.S. economy next year, including rising pressure on emerging economies, especially in Latin America, that will hurt U.S. exports.

In addition, he noted “a generally reduced appetite for risks” by lenders that will probably make it harder to borrow money. For many borrowers, that risk aversion will probably offset the benefit of the tumble in government bond rates.

Speaking separately to an international banking group Monday, New York Fed President William McDonough, who also participated in last week’s rate-cutting meeting, said he is worried that a global credit crunch is looming. He urged regulators to try to persuade banks not to tighten credit since that would worsen an already serious situation.