Fed: Trade frictions threaten resilient economy

By Ros Krasny

BILOXI, Mississippi (Reuters) - Officials from the Federal Reserve on Saturday warned of dangers from a rising tide of trade disputes and the harmful impact on what one otherwise termed a "resilient" United States economy.

Three regional Fed presidents steered clear of current economic or monetary policy topics at a panel discussion on the southern U.S. economy at the Southern Governors' Association conference.

The presidents of the St. Louis, Dallas and Atlanta Feds, respectively, mostly focused on the dangers of protectionism and the need for an educated and flexible work force to cope with rising foreign competition.

The governors convened their meeting in this small city on the Mississippi Gulf coast to mark the second anniversary of Hurricane Katrina, which flattened much of the region in August 2005. Biloxi and nearby communities were "ground zero" for the storm.

RESILIENT ECONOMY

In some of his first remarks since taking over as president at the Atlanta Fed in March, Dennis Lockhart hailed the "resilience" of the region since Katrina, which he said was characteristic of the broader U.S. economy.

But St. Louis Fed President William Poole warned of protectionist sentiment radiating from Washington, which he said could undermine U.S. exports and the growth in better-paying jobs often associated with export industries.

"Some U.S. legislative proposals seem to be based on a presumption that trade retaliation is an effective strategy; however, economic history suggests otherwise," Poole said.

Poole is a voting member of the policy-setting Federal Open Market Committee in 2007.

Many lawmakers blame much of the huge U.S. trade deficit on unfair foreign practices. But Poole said proposed legislation was "unlikely" to affect the trade deficit.

One Senate bill aimed at easing U.S.-China trade imbalances would allow U.S. companies to seek anti-dumping duties on goods from any country that maintains a "fundamentally misaligned" exchange rate after being formally cited by the United States.

"The U.S. economy is fully employed ... we need to focus less on creating more jobs and more on creating better jobs," Poole said. "Increasing (trade) liberalization is central to creating better jobs around the world, including here at home."

Many economists say that a jobless rate under 5 percent shows the U.S. economy is at or near full employment -- the rate below which inflation pressures can build. The U.S. jobless rate has been below 5 percent since December 2005.

Poole has been in the spotlight this month after comments on Bloomberg TV that downplayed the financial market "contagion" to the overall U.S. economy and the need for an emergency reduction to the federal funds rate, the Fed's primary monetary policy tool.

Since then, financial markets have slowly swung around more to Poole's viewpoint, somewhat marking down the chances for aggressive Fed action to rescue the economy.

Lockhart told regional policy-makers of the need to nurture workplace skills to attract the right kinds of jobs -- higher paying, and in new and growing industries such as biotechnology or computer and network engineering.

Competition between states to attract those kinds of companies through domestic or direct foreign investment is often intense, he said.

"States are on the right track when they invest in programs that stress 'foundation skills' such as applied mathematics and reading comprehension," Lockhart said.

Dallas Fed President Richard Fisher spoke on one of his favorite themes, the "creative destruction" of the work force, especially in today's globalized economy.

The southern U.S. lost 80 percent of its apparel manufacturing work force between 1990 and 2005, and much of its payroll at paper plants and furniture makers as well as companies switched production overseas, he said.

"Despite these employment losses, each state in the Southern region now has a larger job base than it did in 1990," Fisher said, helped by growth in emerging service industries.

"Rather than labor fruitlessly to protect your constituents from foreign competition, you and your legislatures must prepare them for it," Fisher said.