Fed officials fret on growth, point to rate hold

BLOOMINGTON, Illinois (Reuters) - Two top Federal Reserve officials on Friday voiced concern about weak U.S. economic growth for the rest of 2008 and said inflation, while a worry, should start to fade over time.

The comments by Chicago Federal Reserve Bank President Charles Evans and Atlanta Fed Bank President Dennis Lockhart suggested the Fed is in no hurry to start raising interest rates while the economy remains in a funk.

Lockhart even said he would not rule out cutting rates if circumstances warrant -- unusual at a time when Fed watchers almost uniformly expect the central bank’s next move to be rate increase.

Evans said the current 2 percent federal funds rate was “not especially stimulative” to growth but further cuts might not help the most distressed parts of the market.

“The financial market turmoil has meant that our funds rate reductions have led to less credit expansion to households and businesses than would typically be the case,” he said in a speech to the McLean County Chamber of Commerce in Bloomington, Illinois.


Lockhart and Evans were united in forecasting weak second-half economic growth, especially as the impact of the federal stimulus package starts to fade.

“The second half of 2008 will likely be extremely sluggish,” Evans said.

Growth will probably not return to a near-trend level of 2.5 percent to 3.0 percent, annualized, until 2010, he added.

Evans’s comment echoed that made on Thursday by Minneapolis Fed President Gary Stern, who said it could be one to three years before the economy picks up a head of steam.

Stern is a voter on the policy-setting Federal Open Market Committee in 2008. Evans and Lockhart will both vote in 2009.

Lockhart also said economy in the second half could be “quite weak” with “risks to the downside.”

Financial markets recently have pared back on ideas that the Fed will start raising benchmark interest rates soon to tamp down inflation.

Bets on a quarter-point increase to the 2-percent federal funds rate by year-end are running at about one chance in three.


Lockhart said inflation is “worrisome” at present, but the tumble in oil prices since early July would help “a great deal.”

The government reported this week that U.S. consumer prices in the 12 months to July jumped at the fastest pace in 17 years, led by increases in the cost of energy and food.

“We’ll see some alleviation of the inflation pressures, and having oil and other commodities come down so strongly helps,” Lockhart said.

But Evans said some pass-through from high energy prices is already under way, boosting core measures of inflation even as headline prices might start to fall.

“We run the risk of persistent widespread price increases being built into the expectations of households and businesses, and those producing persistently higher bases for both inflation measures,” Evans said.

The Chicago policy-maker said the fact that inflation has not yet become embedded in wage growth is not a cause for complacency.

Still, talking to reporters he conceded the “resource slack” expected from a long period of below trend growth should start to temper inflation.

The United States has shed jobs for seven consecutive months, a cumulative loss of over 450,000, pushing the jobless rate up sharply to the current 5.7 percent.


Evans said the recent stimulus package had been a rare event for fiscal policy, in that checks were mailed to millions of Americans in a timely enough way to hit when the economy was weak.

By pulling some consumer spending forward, the package had helped prevent the economy from contracting in the second quarter, as some had forecast, Evans said.

In general, both fiscal and monetary policy have helped prevent a “severe economic downturn,” the risks of which have diminished even though the near-term outlook is sluggish, he said.

Additional reporting by David Lawder in Washington; Editing by Neil Stempleman