Fed Officials Say Recent Rate Hikes Have Not Cooled Consumer Demand
ATLANTA, Jan. 24 (Reuters) - Federal Reserve Bank of Atlanta
President Jack Guynn said on Monday recent interest rate hikes
had not dented U.S. consumer demand, leading some in financial
markets to fear a large rate rise at next week's Fed meeting.
Guynn, who is a voting member of the policy-setting Federal
Open Market Committee (FOMC) this year, also said he wanted to
ensure that U.S. inflation did not rise much above the levels of
the past few years.
``There is no broad-scale evidence that I see yet to suggest
that those three (rate) increases have damped demand very much,
certainly at the consumer level,'' Guynn told reporters after
making a speech to the Downtown Atlanta Rotary Club.
A number of Fed officials, like Guynn, have said they see
few signs that three rate increases in 1999 have cooled the
red-hot U.S. growth driven by strong consumer and business
Guynn said, however, that the full impact of the rate hikes
may not have hit the economy yet and could work with lag time.
The FOMC, which meets next week, is widely expected to raise
the 5.5 percent fed funds rate on overnight bank lending to 5.75
percent in an effort to slow the economy and prevent inflation.
While markets had already been bracing for a rate hike,
Guynn's remarks set off some jitters in the stock market, where
players fear the possibility of an even larger Fed move next
week. Market analysts said he contributed to a hefty sell-off in
``The market is very sensitive to interest rates,'' said Joe
Barthel, chief investment strategist at Fahnestock & Co. in
Great Neck, N.Y. ``The $64,000 question is whether the Fed will
raise rates 25 basis points or 50 basis points in February.''
The Dow Jones industrial average closed down 243 points, or
2.16 percent, at 11,008.
Guynn said he was determined not to lose ground in the fight
against inflation after substantial progress in recent years.
``I would not like to see inflation go a lot higher than
we've had in the last couple of years,'' Guynn said. ``I'm
absolutely not interested in seeing a deterioration in the
inflation performance that we've seen.''
Guynn and San Francisco Fed President Robert Parry, who spoke
at a separate event in Los Angeles, both observed that a number
of one-off factors had conspired to keep price pressures low in
the past few years but were now working against the Fed's
Foreign demand is reviving after the global economic crisis
of 1997-98, oil, commodity and health-care costs are on the
rise, Parry told the National Association for Business
``Labor markets in the U.S. appear to be quite tight,'' said
Parry, who is also a voting FOMC member this year. ``If history
is any guide, this can be expected to show up in faster
increases in labour costs than we've seen so far.''
Guynn also expressed concerns about the diminishing pool of
available labour, saying the supply of workers was not endless.
``There absolutely are limits,'' he said.
But the Atlanta Fed chief, on the whole, was optimistic
about the U.S. economic outlook, saying he expected the near
record-length expansion to continue with rising productivity
growth, at least in the near term.
He forecast real U.S. GDP would grow 3-1/2 to 4 percent this
year, that the consumer price index would rise 2-1/2 to 2-3/4
percent, and predicted an unemployment rate around 4.0 percent.
``I'm optimistic that there are some new things about this
economy that are contributing to the strong growth and low
inflation,'' Guynn said.
Dallas Fed President Robert McTeer, speaking in Texas, also
plugged the notion of a ``new economy,'' in which faster growth
with low inflation was possible because of higher productivity.
He said he believed the economy could continue to grow 4.0
percent annually, even if the growth of the labour force slowed.
That is a bit higher than the rate most Fed officials would
consider sustainable, without inflation, over the long term.
Last year, McTeer was the lone dissenter against two rate
hikes when he was a voter on the FOMC. He made his mark as a
vocal defender of the new economic paradigm which argued that
with technology and improvements in productivity, the economy
could grow faster now without inflationary dangers.