Atlanta Fed Chief Expects Recovery, but Warns of Pitfalls
ATLANTA -- Robert P. Forrestal, president of the Federal Reserve Bank of Atlanta, expects a slow and steady economic recovery but sees it fraught with risks.
While he does not expect a "double dip" recession, he says a slow recovery may not leave much room for error.
As a result, "I'd be prepared to run the risk of too much easing [of monetary policy] rather than holding firm or tightening at this point."
He spoke in an interview last week before the Fed lowered the discount rate on Friday.
2.5% Growth Forecast for 1992
Mr. Forrestal, who is a voting member this year of the central bank's policymaking Federal Open Market Committee, said he expects the U.S. economy to grow about 2.5% next year, after expanding by perhaps less than 1% in 1991.
"That's a forecast, and it's only a forecast," he said. "There are some risks to that forecast, and I think that the risks are really on the downside."
He voiced some concern about the slow growth of the M2 money supply. The Fed ignored the figures at its peril, he said, though they had to be evaluated carefully over a long period given the uncertain link between money supply and the real economy.
Money Supply Lags Behind
M2 has shrunk during the past two months, and growth is now running below the Fed's 2.5% to 6.5% target range.
"I'm a little concerned about it at the moment," said Mr. Forrestal. He said the Fed's credibility could be called into question in Congress and elsewhere if money supply grows at the bottom of, or below, the target.
"We probably need to bring it up more toward the middle of the range," he said, adding, "If the inflation numbers continue to be good, I think we have some room to do that."
Mr. Forrestal welcomed the news of a 0.2% rise in producer prices last month. His staff forecasts core consumer price inflation of 4% to 4.5% next year, but Mr. Forrestal said he was a little more optimistic about lower inflation.
The recent rally in U.S. bond prices indicates that investors are becoming less worried about inflation and gives the Fed more room to ease monetary policy if needed, he added.
Mr. Forrestal said he was a little less hawkish on inflation than some of his Fed colleagues. He backed price stability as a long-term goal, but said that cannot be achieved overnight and should not be pursued at the expense of the rest of the economy.
The Atlanta Fed chief said he had not been surprised or particularly concerned by the slow pace of the recovery so far. A host of factors -- from heavy consumer debt burdens built up in the 1980s, to an oversupply of commercial real estate -- pointed to a slower recovery than usual.
But he voiced some concern about consumer confidence, which has recently shown some signs of slipping.
"If [consumers] see that there's some improvement in the economy -- I think the inflation number is one example of that -- confidence will begin to return," Mr. Forrestal said. But he added he expects only a modest increase in consumer spending.
He said the credit crunch had not gone away and that he would like to see the prime rate lower, but he acknowledged that banks are under pressure to build earnings and capital.
Mr. Forrestal was upbeat about the outlook for U.S. manufacturing. He expects exports to continue to be fairly buoyant and the trade balance to move into surplus next year.
He did not profess any concern about the slowdown in economic growth in Japan and Germany, as the two countries' economies are still continuing to expand quite well. He saw no need for a lower dollar to boost U.S. exports now, noting the Fed does not target foreign exchange rates anyway.