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Fed says it will take time to gauge war impact

April 01, 2003 12:12 IST
The impact of the Iraqi war on the US economy cannot be gauged until enough critical data relating to the period since the war's onset is available over the next several weeks, Federal Reserve policymakers said on Monday.

"(With) the data that we have, it's really hard to tell what is due to war-related issues and what is due to other fundamental economic issues," Federal Reserve Governor Susan Bies told reporters in New Orleans. "We will have to get some more data behind us."

Bies' remarks echoed the wait-and-see tone of the Federal Reserve's policy statement earlier this month. At that time, largely because of the impending war, Fed policymakers abandoned their usual comment on the economic outlook.

But in comments that contrasted with the majority Fed view that war is the main uncertainty, Boston Federal Reserve Bank President Cathy Minehan said businesses are also dealing with the aftermath of excess investment in the 1990s.

Minehan highlighted the recent run of weak economic news on employment, consumer confidence and retail sales and said the recovery seemed to have softened in recent months.

"Speaking from my own perspective, policymakers will need to be especially vigilant," Minehan said, echoing language in the last Federal Reserve policy statement that suggested the central bank could move on interest rates between scheduled meetings. The next policy meeting is scheduled for May 6.

Minehan told business leaders in Waltham, Massachussetts the loss of 308,000 jobs in February was "a very unwelcome development", and noted more recent data on initial unemployment insurance claims are elevated, suggesting little improvement in the job market.

Recovering from the Bubble Years

The next payrolls report, due on Friday, April 4, is expected to show a small decline in March, and will be critical for expectations on interest rates.

The futures market on Monday was pricing in a 60 per cent chance of a rate cut in May, and almost 70 per cent chance of a cut by mid-year.

Minehan is not a voting member of the Fed's policy committee this year, but her comments reflect the less than optimistic assessment of the New York Fed's William McDonough.

A large minority of primary bond dealers trading directly with the Federal Reserve expect the central bank will be forced to cut rates again in coming months, though recent comments from central bankers suggest a preference to wait for more data.

The Fed in its policy statement on March 18 stuck to its view that the economy will pick up once the uncertainty about war lifts.

Minehan, however, pointed to excesses of the late 1990s that could keep hampering the recovery.

"It is clearly possible that the summer will bring new economic vibrancy, and most forecasts see a pick-up. But it is also possible that this period of slow recovery from the excess investment on the late '90s will continue," she said.

Before the Fed's last interest rate cut in November, a Minehan speech highlighting risks to the recovery was the one official hint that the central bank was considering easing policy. It has cut rates 12 times since early 2001.

Bies said the Fed would keep a close eye on the war and its economic impact.

"We will monitor it, and if we feel at any point that some action needs to be taken, we'll take action as appropriate," Bies said. "War is a huge uncertainty. You can't even lay out the alternatives much less assign each alternative a probability."

In recent days concerns about a longer, more drawn-out conflict in Iraq have mounted.

Separately, St Louis Fed President William Poole said the dollar would probably strengthen when the US economy does, and its decline since early last year was not "a matter for serious concern".