Fed on recession alert
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January 8, 2001: 3:51 p.m. ET
Fed officials watchful of slowdown; one private economist sees recession
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NEW YORK (CNNfn) - The slowdown of economic activity currently under way in the United States is healthy, though the Federal Reserve is on alert for signs that it may be too much, too fast, two Fed officials said Monday.
At the same time, a prominent Wall Street economist took the latest concern about the pace of the economy one step further, warning that the likelihood of an outright recession is greater than ever.
The economic slowdown is "mostly healthy," Fed Bank of Atlanta President Jack Guynn told the Atlanta Rotary Club, cautioning against overreacting to a moderation in the world's largest economy.
Guynn, calling the U.S. economy the "envy of the world," predicted growth of about 3 percent in 2001, a slight uptick in the unemployment rate from its current level of 4 percent, and stable inflation.
"In the long term, though, I think the moderation of growth that we'll witness in 2001 will be a mostly healthy thing," Guynn said.
"It will help the economy avoid some serious imbalances that might otherwise have begun to accumulate, and it will help ensure that growth remains sustainable," he added. Guynn this year is a non-voting member of the Fed's rate-setting Federal Open Market Committee.
Guynn's comments came less than a week after the Fed slashed key short-term interest rates by an aggressive half percentage point to give the slowing economy a shot in the arm and help it avert a recession after almost a decade of non-stop growth.
Overreacting?
Guynn cautioned policymakers, businesses, investors and consumers against overreacting to the widely expected moderation in growth, noting that "inflated expectations could be just as damaging as rising prices" to the economy.
"Slower GDP growth is not the same thing as no growth; a slightly higher unemployment rate is not the same thing as high unemployment; and a very modest uptick in measured inflation does not signal a return to accelerating inflation," he said.
Guynn said he is confident the economy will slow as the Fed hoped it would when it raised interest rates six times between June 1999 May of last year to prevent the then-booming economy from overheating.
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Slower GDP growth is not the same thing as no growth; a slightly higher unemployment rate is not the same thing as high unemployment; and a very modest uptick in measured inflation does not signal a return to accelerating inflation.
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Federal Reserve Bank of Atlanta President Jack Guynn |
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"The slowdown we're witnessing in spending growth ought to ensure that a more comfortable and sustainable balance is achieved between demand growth and supply growth, and that inflation remains low," he said.
All the same, Dallas Fed President Robert McTeer offered a more cautious view for financial markets Monday, indicating that the Fed is on high alert for signs of excessive slowing.
"We are going to be very alert...looking for any weakening," McTeer said, underscoring the possibility of further rate cuts. Wall Street expects another reduction in borrowing costs at the end of this month.
Speaking to local business and political leaders in the town of McAllen on the Texas-Mexico border, McTeer said that although the economy felt weak in the last three months of 2000, he did not think it contracted. "I doubt that the fourth quarter was a decline," he said.
McTeer said the weakness in the economy appeared to be concentrated in manufacturing more than in other sectors.
Recession warning
Both Fed officials' remarks came as one of Wall Street's more prominent economic forecasters downgraded his outlook for the current year.
Morgan Stanley Dean Witter's top economist told clients Monday to brace for a recession in the U.S. and possibility a "full-blown global recession" starting sometime this year.
"We are shifting to an outright recession scenario in the United States, and, in response, we are slashing our forecast of the global economy for 2001," Chief Economist Stephen Roach wrote in a research note to clients.
"The risks remain very much on the downside, and I would now attach a 45 percent probability to a full-blown global recession," he said.
He cut his expectation for 2001 growth in the global gross domestic product by 17 percent to 2.9 percent, with the assumption of a U.S. recession accounting for about half of the downward revision.
The firm now sees the U.S. economy contracting by around 1.25 percent annualized in the first half of this year. Morgan Stanley is more bearish than many on Wall Street, with most economists still expecting growth, however small, in the first half of the year.
-- from staff and wire reports
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U.S. Federal Reserve
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