Fed Member: Economic Woes to Linger Well Into 2001

The United States' economic "adjustment" is taking longer than expected, the head of the Federal Reserve Bank of Atlanta said Thursday, noting a rebound likely will not come until late 2001 and into 2002.

Atlanta Fed President Jack Guynn also said in an interview with Reuters it was likely the U.S. economy will skirt a recession, noting that several positive factors, such as tax cuts, Fed rate reductions, decreased inventories and lower energy costs, were supporting the economy.

"It now looks certainly more like it's going to be late in the year and into next year before some of the things that I've been banking on are going to fully kick in," Guynn said in a telephone interview. "The process, the adjustment process, is just taking longer than I, and I think many other people, thought that it would."

Guynn, who is currently not a voting member on the Fed's policymaking panel following the usual rotation among Fed presidents, previously had said he expected a rebound in the second half of 2001, which began in July.

"Certainly everything that we sense at the moment is that that (economy) completely hasn't turned around," Guynn said. "I think there's a good chance that we will in fact be able to get back to a better growth rate without seeing it go negative."

A recession is commonly defined as two straight quarters of contraction, or negative Gross Domestic Product. So far, growth -- although low -- has stayed in positive territory. The United States last was in a recession in 1990 and in 1991.

TICK TOCK, TICK TOCK

Guynn's comments came less than two weeks before he and the rest of the Fed's policymaking panel gather in Washington to discuss interest rates. The Fed is widely expected to cut rates for the seventh time this year at its meeting on Aug. 21, this time by a quarter-percentage point.

Economists are less certain, however, if the Fed will then hold steady for the rest of the year or cut rates further.

The Fed has cut rates a total 2.75 percentage points in 2001 to try to boost the sputtering economy. The key fed funds rate, which influences borrowing costs across the economy from mortgages to credit cards, is 3.75 percent, a seven-year low.

Guynn said inflation was "not a large worry" in the near term, suggesting the Fed can feel comfortable cutting interest rates. The central bank raises rates to thwart inflation and would likely be hesitant to cut them if prices were a concern.

The Atlanta Fed chief said there were other positives working in the economy's favor.

For one, firms have managed to decrease some of their inventories. At the start of last year when the economy was booming, firms ordered a large batch of goods to meet sizzling demand. But when the economy began to slow later in 2000, companies found themselves burdened with bulging stockpiles.

That led to a massive slowdown in manufacturing, which economists say has been in a recession for a year.

Some have expressed concern that the manufacturing sector's woes would bring the rest of the economy down with it. Those fears were heightened Wednesday when the Fed, in its regular anecdotal report on the state of the economy, said manufacturers' problems were being "spilled" into other sectors of the economy, such as trucking and shipping.

But Guynn, who has worked at the Atlanta Fed for 37 years and has been president for more than five years, said a turnaround may be on the way for the manufacturing sector and said the spillover effect was completely expected.

"I think we're well along in terms of the inventory adjustment process but it varies by company and by industry," Guynn said. "That's one of the things that I think suggests that better times are ahead."

"REMARKABLE"

Guynn echoed recent comments by Fed Chairman Alan Greenspan that the economy has actually held up well amid several shocks over the last year, including higher energy costs, reduced demand for U.S. goods from abroad due to economic troubles overseas and a technology sector free fall.

"Things could be a lot worse," he said. "I think the fact that the economy has continued to grow, even at a meager rate, is actually remarkable in some ways."

But Guynn said growth would not go back to the "heady" numbers seen in the past several years when the economy moved ahead at an extraordinary pace -- a pace that Fed officials feared would spark inflation, prompting them to raise rates.

He also cautioned that when it comes to the economy, the Fed is not carrying all the ammunition.

"I worry about those that put so much emphasis on what we will do at the next meeting," he said.

"I think that, while it's certainly important, it perhaps gives too much emphasis to the role of policy even in the short term," he said. "It makes people forget that these other fundamental adjustments that are taking place have to take place. Some people seem to get the view that we have this magic we can work to take all of these ills away."

And, he said, a lot of good will come out of this so-called adjustment period. Consumers will have scaled back their buying frenzy that put them into record amounts of debt. Businesses with no plan and no profits will have been absorbed by other, more stable, companies, or wiped out entirely. And firms will have fewer expenses after being forced to trim costs.

"I think when we come out of this, and the orders begin to come back, we're going to have companies that are better positioned to compete both domestically and internationally than was the case before," he said.