August 4, 2002	Sunday	Jamadi-ul-Awwal 24,1423

WASHINGTON, Aug 3: The US economy remains in the midst of a “modest expansion” despite downward revisions to data over the past three years and weak second-quarter growth, San Francisco Federal Reserve Bank chief Robert Parry said on Friday.

Although the path of expansion does appear to be volatile, I believe it’s still intact, he said.

But Parry said the central bank would act decisively if the economy weakens dramatically.

If we were to see — as a result of either miscalculation or as a result of some outside event — that the economy stalled I think the Federal Reserve would take that into account and act very decisively to make sure that the consequences of that would be minimized.

Speaking at a Portland Community Leaders luncheon, Parry said he did not think the economy would slip back into recession.

There are a lot of conflicting signs, but quite frankly I do not still think that there is a high probability or even a significant probability of what is referred to as a double-dip, he said.

On Wednesday, the Commerce Department reported that there had been three consecutive negative quarters of growth in 2001. In addition, the government reported that second-quarter growth had slowed to a 1.1 per cent annual rate from a 5.0 per cent rate in the first quarter.

But he said the recent data don’t change my basic view that we’re in the midst of a modest expansion.

Parry acknowledged that second-quarter growth “came in somewhat lower than we expected” but said some of the weakness was caused by “transitory factors,” specifically a large rise in imports in the quarter that are subtracted from growth.

Looking ahead, it’s quite unlikely that we’ll see such a large number of imports for this quarter. That’s at least one reason to expect more positive growth in the near term, he said.

Parry said consumer spending and business spending trends are moving in the right direction.

Another factor that could boost growth is the drop in the dollar so far this year, he said.

In his prepared remarks, Parry repeated a statement he first made in April that the Fed’s monetary policy stance is quite stimulative right now.

And at some point, of course, interest rates will have to move up toward historical levels, or we could risk igniting inflation, he said.

But in new language, Parry added that doesn’t look like an immediate concern.

Core inflation does not appear to be an imminent problem, as there’s still quite a bit of excess capacity left in the economy, he said.

The new outlook is a sharp reversal from just a few weeks earlier, when many experts were expecting a rate hike in response to a strengthening US economy.

The boldest outlook came from Goldman Sachs economists, who see the Fed trimming the current federal funds rate of 1.75 per cent by three-quarters of a point by year-end.

We are downgrading our GDP growth and interest rate forecasts, the economists said in a research note. We are implementing these changes now because recent economic news has confirmed some of our worries that the stock market decline would affect business hiring and investment decisions.

In light of the string of weak data over the past few days, Fed officials are likely to ease by 75 basis points in the fourth quarter, reducing the target federal funds rate to one per cent by year-end, said senior Goldman Sachs economist Edward McKelvey.

Fed officials have undoubtedly been surprised by the recent weakness, given the tenor of Chairman (Alan) Greenspan’s midyear testimony to Congress.

Goldman Sachs economists do not see the world’s largest economy sliding back into a “double dip” recession, but foresee a sluggish growth pace of 2.5 per cent in the third quarter and two per cent in the fourth quarter.

Accordingly, although Fed officials undoubtedly share our view that double dip is not the central case, we believe they will want to take out more insurance against that possibility, McKelvey said.

Moreover, the Fed staff’s analysis of the Japanese experience suggests that in a slow growth, low inflation environment monetary policy should err heavily on the side of excess accommodation.

Other analysts were more cautious in their outlook but said the Fed may trim rates if the economy remains sluggish.

Robert DiClemente of Salomon Smith Barney said he thinks the Fed may step in if it appears the recovery is faltering.

The prospect of a fading recovery with increasing financial headwinds is a toxic brew for the outlook and would justify renewed easing, he said, but added that the clincher for any move would have to be evidence that consumer retrenchment is reinforcing the wobbly behavior creeping into business data.

But DiClemente said he expected for the Fed to wait for more data, and was unlikely to act on rates until its September meeting.

Anthony Karydakis of Bank One said that Friday’s report showing a sluggish pace of jobs growth legitimizes the concerns that have emerged from a number of other data recently that the recovery is losing momentum. At a minimum, the report keeps alive the risk (35 to 40 per cent) of the Fed easing at some point this fall.

Joel Naroff of Naroff Economic Advisors said he sees a slight chance of a rate cut if economic data comes in weak. But he said even a rate cut may not be able counter a downturn if it is driven by psychological factors and the turmoil on the stock market.

If it is the equity markets that are causing all this, there is nothing the Fed can do about it, he said. And that is even more worrisome.—AFP