--Minehan: It's hard to see a turnaround yet in economic data
--Minehan says "downside risks are real" in short-term
By Edward Kean Washington, June 18 (BridgeNews) - Boston Federal Reserve Bank President Cathy Minehan said Monday that inflation may become a worry when the U.S. economy rebounds. But in the short-term, the economy faces "downside risks," and it is hard to find any sign yet of a turnaround, she said.
In remarks prepared for delivery at the Boston Municipal Research Bureau, Minehan said, "Headline inflation, absent the impact of energy costs, which are expected to be transitory, has been relatively moderate lately. But further down the road, as the economy retraces its steps back to its long-term rate of growth, this may become a concern that needs to be addressed." Minehan is a current voting member of the Federal Open Market Committee, the Fed's policy-making arm. A text of her remarks was made available here.
Minehan said she believed there is a "good chance" that the consensus forecast of private economists for an economic pickup in the latter part of 2001 will be achieved. "But this is by no means a certain outcome, and the preponderance of current economic data suggests that in the short run, downside risks are real," she said. Indeed, Minehan said the Boston Fed staff found a "pessimistic tone" in their recent conversations with business contacts in the New England region about the economy.
"The situation at the end of May, when these conversations were held, was quite different from that six weeks earlier," she said. "Business was reported to be flat to down compared to a year earlier and our contacts were nervous about the outlook. They do not know when to expect an upturn." Discussing the economic outlook, Minehan said there is a "distinct pause" in the willingness of companies to spend on business equipment. "Businesses are waiting to see clear signs that demand for their products has returned; I believe that will occur, but it's hard to see the turnaround in the data yet," Minehan said. By the same token, consumer spending has "held up fairly well," she said, stressing that consumers "have not moved into recession mode." Also, new housing construction has held up well and the willingness of consumers to make home purchases is "encouraging."
If labor markets remain "relatively solid," the recently approved tax cuts may encourage consumers to keep spending, she said. Assuming taxpayers spend about half of the expected tax rebate, this would add about 0.5-0.75 percentage points to growth in the third and fourth quarters, she said. Minehan said much of the impact of the Fed's rate cuts will be felt later this year along with the tax cuts "just when other parts of the economy may be turning up."
The continued willingness of consumers to spend is "key" to continuing the economic expansion, she said. Minehan acknowledged there are "risks" in this area, citing the possibility that job uncertainties may cause demand for cars and other consumer durable goods to weaken. Also, the weakness in the stock market may cause upper income consumers to retrench, she said.