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Two Fed Officials Hint More Rate Cuts May Be Coming
By: Reuters | 09 Jan 2008 | 08:09 AM ET
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Federal Reserve officials from opposite ends of the ideological spectrum had a similar message
Tuesday -- that further interest rate cuts could lie ahead given risks to economic growth in the United States.

"The economy is going to be weak; the real question is how much weaker it's going to get," Charles Plosser, President of the Philadelphia Fed, said in a speech in Pennsylvania.

Federal Reserve
The Federal Reserve headquarters in Washington, DC.

Meanwhile, Boston Fed President Eric Rosengren said the U.S. housing market was on track for its worst performance in half a century.

Rosengren stopped short of predicting a recession, as many private analysts have done recently, but told a meeting of the Connecticut Business and Industry Association in Hartford, Connecticut, that previous downturns in the mortgage sector were generally associated with hard economic times.

"History may or may not repeat itself ... the continued decline in residential investment has heightened the risks of a more significant downturn in the overall economy," he said.

Rosengren, who became Boston Fed President in 2007, is seen as among the U.S. central bank's most dovish members.

He voted against the policy-setting Federal Open Market Committee's decision in December to lower benchmark rates by a quarter percentage point, calling instead for a half-point cut.

A polar opposite on the ideological scale, Plosser said he was "open" to further rate cuts if needed, while warning of the risks that higher inflation will pose to policy-makers this
year. (Policy makers argued about how much to cut rates in December. Click for more).

The Fed must remain "vigilant" on inflation and "be prepared to act as necessary," Plosser said in Gladwyne, Pennsylvania, in a speech to the Main Line Chamber of Commerce.

Plosser is often paired with Richmond Fed President Jeffrey Lacker at the hawkish end of the policy spectrum. He joined the Philly Fed in 2006 but will have his first vote on the FOMC
this month.

Plosser said recent data suggested inflation is becoming more broad-based, with "more worrisome signs" of underlying price pressures since recent gains were not solely based on
higher energy prices.

Given the lag between policy actions and their impact on the economy, rate cuts can do little to avert the below-trend growth expected in the first half of 2008, he said.

Plosser told reporters that he was "absolutely" open to further rate cuts if necessary but had not made up his mind.

"I don't think we've overshot yet," Plosser said. "There are risks to the downside of even weaker economic growth."

Since mid-September the FOMC has lowered its benchmark lending rate to 4.25 percent from 5.25 percent.

Financial markets expect the Fed to continue its rate-cutting ways at its next policy meeting on Jan. 29-30 and currently lean toward a more aggressive half-point cut after spending weeks mulling the merits of a quarter-point cut.
   
Rosengren said the housing debacle had taken place amid a relatively stable labor market, but warned that Friday's unexpectedly weak December jobs report could signal a shift.

The monthly payrolls data from the U.S. Department of Labor showed job creation at a near-standstill, while the jobless rate jumped to 5.0 percent from 4.7 percent.

Plosser termed the report "pretty disappointing" and added that the unemployment rate may rise somewhat above 5 percent this year, reflecting current below-trend growth.

But Plosser also looked for growth to improve "appreciably" in the second half of 2008 and for the economy to grow 2.5 percent this year on a fourth-quarter-to-fourth quarter basis.

There is still little evidence that financial strains that surfaced in August from concerns about losses stemming from U.S. mortgage assets were affecting the broader economy, he said.

Meanwhile, the punishing downturn in the housing sector, which has dampened economic growth for over a year, would likely bottom out near the middle of 2008, he added.

Copyright 2009 Reuters. Click for restrictions.
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