Austin/Atlanta: High unemployment and reluctant consumers will likely make an incipient US economic recovery weak and erratic, top Federal Reserve officials said in a string of speeches across the country on Tuesday.
That means interest rates, currently at historic lows close to zero, should remain near that floor for the foreseeable future, the policymakers said.
“The strength and durability of the expansion is in question,” said Janet Yellen president of the Federal Reserve Bank of San Francisco, in Phoenix, Arizona. “High unemployment, weak job growth and paltry wage increases are a recipe for sluggish consumer spending growth and a tepid recovery.”
Echoing her remarks, Richard Fisher, head of the Dallas Fed, flagged commercial real estate and a heavy reliance on government stimulus as other key risks.
“The more demand you steal from the future, the less future demand there is for you to steal,” Fisher told the Austin Headliners’ Club, a group of Texas business executives, lobbyists and politicians.
The US economy grew 3.5 % in the third quarter, unofficially emerging from its worst recession in generations. But the jobs picture remains dismal, with the unemployment rate surging to 10.2 % in October, its highest level since 1983. A Reuters poll on Tuesday showed economists expect it to hit 10.5 % in mid-2010 before subsiding.
Fisher said he was mindful of the possibility that the central bank’s pledge to keep rates at rock bottom for an “extended period” could fuel unwanted speculative activity in financial markets.
“I am fully aware that the law of unintended consequences is lurking in the shadows,” Fisher said. “Were this to become a disorderly influence, I would expect the FOMC and other authorities to craft an appropriate remedy,” he said.
Pressed on the issue by reporters, he added: “Thus far, the dollar has not been in a disorderly depreciation.”
Some analysts fear a more rapid fall in the US dollar, which recently hit a 15-month low, could disrupt global markets.
The Fed slashed borrowing costs in response to the global financial crisis, and has pumped more than $1 trillion into the banking system. The White House and Congress also lent a hand with a $788 bilion stimulus package of tax cuts and spending.
As key government programs like mortgage tax credits and car-buying incentives wane, private demand may struggle to fill the void, Fed officials said, particularly given the state of the labor market.
“At this juncture, it’s hard to be encouraged about a fast rebound in job growth,” said Dennis Lockhart, president of the Atlanta Fed.
Still, Lockhart said he could envision a scenario where the Fed might have to tighten policy even with unemployment “frustratingly high”.
Richmond Fed President Jeffrey Lacker was more upbeat than his colleagues, telling CNBC the broad contours of recovery would be the same even without government stimulus.
Nevertheless, he made clear he was not itching to push up rates. Asked if a hike was in the cards for next year, Lacker, considered an inflation hawk, responded: “It is too soon to say ... it could take longer than that. What I’m going to look for is growth that is strong enough and well-enough established that we need higher real interest rates.”
Eric Rosengren, of the Boston Fed, agreed: “It’s a question of timing. We’re not there yet.”
Yellen, Lockhart and Lacker are among the voters this year on the Fed’s policy panel, while Rosengren will move into a voting slot in 2010. While Yellen and Rosengren are seen as Fed “doves,” Lockhart is considered more of a hawk.
Fed Board Governor Daniel Tarullo spoke in New York, but focused his remarks on financial regulation rather than the economic outlook.
As officials looked for ways to describe the likely shape of the economy’s trajectory -- a V representing a robust rebound, an L denoting stagnation, a W flagging the risk of renewed contraction -- the alphabet no longer seemed enough.
“The letter I would choose doesn’t exist in our alphabet, but if I were to describe it, it would look something like an “L” with a gradual upward tilt of the base,” Yellen said.
Fisher was thinking along the same lines, but opted for a symbol instead.
“We are more likely to see a more uneven recovery -- not a V-shaped recovery but something more akin to a check mark, where the elongated arm of that check mark inclines at a slope that is less than desirable and might possibly be repressed by an occasional pause or several quarters of weak growth,” he said.