Federal Reserve dampens speculation on rate cuts

Federal Reserve officials yesterday threw more cold water on speculation about future rate cuts.

While acknowledging the US economy's weakness, they did not hint at any sense of urgency, suggesting only that the central bank would pay close attention to upcoming economic reports.

Mr Anthony Santomero, president of the Philadelphia Federal Reserve and a voting member of the Fed's policy-making Open Market Committee (FOMC), said, while the recovery was frail, he did not see a significant deflation risk. He felt consumer finances were in "good shape", that "healthy growth" would resume and that monetary policy was "appropriately supportive".

His remarks depressed bets in financial markets on future rate cuts, already diminished by the current stock market rally.

After a sharp rebound in the first quarter from last year's recession, the economy stumbled in the second quarter as stock prices and investment faltered forcing serious consideration of new stimulus measures. Fed policymakers voted unanimously last week to keep short-term interest rates at a 40-year low of 1.75 per cent, judging policy to be sufficiently stimulative, but they also expressed unease over the economy's travails.

Chicago Fed president Mr Michael Moskow, a non-voting FOMC member, appeared less upbeat than Mr Santomero in a separate speech, saying that, while the Fed should not try to "smooth out every bump" in the road, deflation risks should be monitored carefully. He said a real recovery depended on investment, which itself had a "long way to go".

Mr Santomero said it was "too soon" to judge what Fed policymakers would do at their next scheduled meeting on September 24th.

The remarks followed comments by Mr R. Glenn Hubbard, a top White House economist, on Tuesday. He strongly suggested the Bush administration would renew its push for tax changes that it argues will spur investment. Critics say these measures alone would aggravate a budget deficit already on track to be the worst in at least six years and would not address the immediate problems of capacity gluts and weak demand.

San Francisco Federal Reserve Bank President Mr Robert Parry said yesterday the current level of US interest rates is "appropriate" and stimulative for the economy, which is in a modest expansion.

"The Fed's monetary policy stance is quite stimulative right now, and I think that's quite appropriate," Mr Parry told the Chamber of Commerce in Emeryville, California. He is not a voting member of the central bank's policy committee this year. - (Financial Times Service/Reuters)