Chicago Fed President: Economy to Improve in 2001

NORTHBROOK, Ill. – The U.S. economy should improve later this year but ``significant risks'' threaten that upbeat outlook, Federal Reserve Bank of Chicago President Michael Moskow said on Wednesday.

Moskow based his optimism on expectations that inventories would be coming into better balance as the Fed's aggressive interest rate cuts stimulate demand later in the year.

``We now expect to see improvement later in the year, but there are significant risks facing us,'' he said in a speech to the Rotary Club of Wilmette.

Moskow said those risks included higher energy prices, weak economies abroad and soft consumer confidence.

Inflation, however, did not make his short-term risk list. The Chicago Fed chief said he was ``cautiously optimistic that inflation will remain in check'' but added the Fed ``can never ignore'' price pressures.

``When you survey the U.S. economy right now, the risk of economic weakness is greater than that of inflation,'' he said.

He said quick action by the policy-setting Federal Open Market Committee, which has chopped rates five times so far this year, would likely ensure further gains in economic growth next year.

``I think the most likely scenario is for economic growth to pick up later in the year from its current slow but positive pace -- with improvement continuing next year,'' he said. ``The FOMC's prompt response to the subpar economic growth of recent quarters reduced the likelihood that economic weakness would continue in 2002.''

The Fed has cut interest rates this year by a total of 2-1/2 percentage points to boost the ailing U.S. economy. The key fed funds rate is now at 4 percent, its lowest level in seven years.

Moskow is a voting member on the Fed's policymaking committee this year, following the usual rotation among Fed presidents.

He went into detail about the status of the reduction in inventories across various industries. While automakers have made significant strides in reducing bulging stocks, other sectors -- especially high-tech -- have ``quite a bit further to go in adjusting their inventory levels,'' he said.

The Chicago Fed chief noted that high-tech companies were ''slower to respond'' to the ``inevitable'' softening of demand.

``Many sectors still have inventory levels that are not necessarily high by historical standards, but are higher than they would like,'' he said. ``Until these inventory levels come down sufficiently, production growth will lag sales growth for some time longer.''

Moskow said he was optimistic that productivity growth would continue at ``relatively high levels'' but noted that weak numbers, like that seen in the first quarter may be seen for ''some quarters'' as the economy grows below potential.