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Top Federal Reserve Officials Predict Weak Second Half; Warn Growth May Not Return Until 2010

From Staff Reports

Two top U.S. Federal Reserve officials on Friday predicted a weak second half for the U.S. economy, warning that strong U.S. growth may not return until 2010.

Atlanta Federal Reserve Bank President Dennis P. Lockhart and Chicago Fed Bank President Charles L. Evans both said the U.S. central bank is in no hurry to start raising rates while the American economy is sputtering badly because of an ongoing global financial crisis, a sagging housing market and inflationary pressures caused by a yearlong run-up in food-and-energy prices.

Indeed, Lockhart even said he wouldn’t rule out actually cutting interest rates if economic circumstances warranted – a remarkable admission at a time when the economic crisis is juxtaposed over rising inflationary pressures, and when most Fed-watchers expect the central bank's next move to be an increase in interest rates, Reuters reported. A reduction in interest rates would jump-start U.S. growth.

Evans conceded that the current 2.0% Federal Funds rate was “not especially stimulative” to growth, but also warned that additional reductions in this benchmark interest rate might not be enough to avert a weak second half by reinvigorating the hardest-hit portions of the U.S. economy.

"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," Evens said in a speech to the McLean County Chamber of Commerce in Bloomington, Ill.


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, noting that growth probably not return to a near-trend level of 2.5% to 3.0%, annualized, until 2010.

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, Reuters reported. Stern is a voting member of the policymaking Federal Open Market Committee (FOMC). Evans and Lockhart will both become voting members next year.

Lockhart also said economic growth in the second half could be "quite weak" with "risks to the downside." The financial markets recently have pared back on ideas that the U.S. central bank will start raising benchmark interest rates soon to hammer down inflation.

Government reports last week said that U.S. consumer prices in the 12 months to July jumped at the fastest pace in 17 years, headed by increases in the cost of energy and food. Lockhart said inflation is "worrisome" at present, but the tumble in oil prices since early July would help "a great deal."

"We'll see some alleviation of the inflation pressures, and having oil and other commodities come down so strongly helps," Lockhart said.
Bets on a quarter-point increase to the 2.0% benchmark Federal Funds rate by year-end are running at about one chance in three, published reports state.

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