Fed officials try to quell U.S. recession fears

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Friday January 19, 1:32 pm Eastern Time

Fed officials try to quell U.S. recession fears

By Barbara Hagenbaugh

RICHMOND, Va., Jan 19 (Reuters) - Everybody take a deep breath and calm down.

That's what Federal Reserve officials have been urging investors, consumers and, most of all, private economists to do in recent weeks to halt recession fears before they become a self-fulfilling prophecy.

The latest effort came from Federal Reserve Bank of Richmond President Alfred Broaddus, who on Friday said that while the U.S. economy had clearly slowed, there were few signs ``of a sharp, across-the-board decline in economic activity.''

Broaddus said he expected the record-long U.S. economic expansion -- now in its 10th year -- to remain on track, albeit at a slower pace, in 2001. In other words: No recession.

But Broaddus and the others at the central bank are having a hard time injecting cheer into the markets. Just as quickly as a new Fed official comes out with a positive economic outlook, another private economist announces that the U.S. economy is already contracting, or about to.

Although not a majority, a handful of major Wall Street firms now expect the economy to stop growing this quarter, among them Morgan Stanley Dean Witter, which predicts a recession for the first half of the year. A recession is commonly defined as two consecutive quarters of contraction.

And the recession fears are not just limited to those who study numbers for a living.

According to a Reuters/Zogby poll released on Friday, more than half of those interviewed -- 51 percent -- believed the U.S. economy was on the edge of a recession, while 39 percent thought the current prosperity would continue and 10 percent were unsure.

POSITIVE SPIN

Even politicians have uttered the ``r-word'' -- notably Vice President-elect Dick Cheney who warned in early December that the country ``may well be on the front edge of a recession.''

Cheney and President-elect George W. Bush, who will be sworn in on Saturday, have scaled back their comments after receiving harsh criticism for fomenting fears. Some economists believe that talk of recession can help fuel a downturn in the economy if people tighten their purse strings.

As the U.S. economy has slowed, the once-lofty confidence of consumers has taken a tumble. According to market sources on Friday, a University of Michigan survey showed consumer sentiment plunged in January to its lowest level in more than four years.

``The continued deterioration in confidence here is certainly a warning sign that the Fed probably has more work to do to create a sense of calm about the economic prospects,'' said Dana Johnson, senior managing director and head of research at Banc One Capital Markets in Chicago.

While they listen closely to what Fed officials say for clues on the direction of monetary policy, economists say U.S. central bankers will never present a doom-and-gloom scenario, no matter what the situation.

Fed officials ``basically have to put a positive spin on the economy,'' said Sung Son Sohn, chief economist at Wells Fargo Bank in Minneapolis. ``No Fed official will ever say, 'the economy is in deep trouble, we are about to fall off the cliff.' That is simply unacceptable.''

``We always try to read in between lines and try to expect the worst,'' he said. ``That's how the market operates.''

Economists and investors will be tuning in on Thursday when Fed Chairman Alan Greenspan testifies before the Senate Budget Committee. Although the topic of the hearing is fiscal issues, analysts are eager to hear if the highly revered chairman says anything about the current state of the economy.

The Fed took investors by surprise earlier this month when it slashed interest rates by a hefty half-point in between scheduled policy-setting meetings -- a rare move -- in response to signs the economy was cooling fast. The Fed is widely expected to lower rates again after its next meeting on Jan. 30 and 31 in a further effort to buffer the economy.

NOT IN 3-D

In the meantime, a slew of Fed officials have been coming out of the woodwork to try to calm things down a bit.

On Thursday, St. Louis Fed President William Poole said U.S. economic conditions do not qualify as recessionary, noting that in order to rate as a true recession, an economic downturn must meet the test of the three D's -- duration, depth and dispersion.

``Duration, it must be more than a blip on the economic horizon; depth, it must be deep; and dispersion, it must be across a wide range of industries,'' Poole said after a speech in Memphis, Tenn., to the Risk Management Association.

``The economy doesn't meet the three-D test,'' he said.

The day before, Philadelphia Fed President Anthony Santomero, the newest member of the Fed's policy-setting Federal Open Market Committee, said the economy remains ``quite sound'' even though it has slowed substantially.

And Broaddus, like others at the Fed, sought to reassure that the powerful central bank was keeping a close eye on the economy and was prepared to act if necessary.

``The Fed's recent easing...has sent a reassuring confirmation that the Fed is alert and well aware of the turn in household and business sentiment in recent weeks, and is prepared to act decisively to help keep the economy from softening excessively,'' Broaddus said.

-- Don't use (the@'R'.word), January 22, 2001


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