Fed's Poole Says `Best Bet' Is Economy Will Avoid a Recession

Fed's Poole Says `Best Bet' Is Economy Will Avoid a Recession

Feb. 12 (Bloomberg) -- Federal Reserve Bank of St. Louis President William Poole said that the U.S. will probably avert a recession and that the Fed's interest-rate policy is appropriate for the slowing economy.

``The best bet is that we will not have a recession,'' he said in answering questions after a speech in St. Louis yesterday. ``My take on the current policy situation is that policy is at a good place for both the long-run concern and for cushioning the impact of financial disturbances.''

Investors anticipate the central bank will lower its benchmark interest rate by a further half point by mid-March after five reductions to 3 percent since September. Fed officials are attempting to prevent the first U.S. economic contraction since 2001, and last month lowered the overnight bank-lending rate at the fastest pace since 1990.

While consumer spending is ``soft,'' that is ``completely different from crashing,'' Poole told reporters later. ``It's a very different story so far from some of the past recessions that I remember living through, when things really plummeted.''

The 70-year-old bank president, who took office in 1998, retires from the central bank March 31.

In his speech to the National Association for Business Economics, Poole said that policy makers' efforts to provide interest-rate guidance in statements after each decision may cause more communication problems than they solve.

Bernanke Meeting

Poole was the first of five Fed speakers this week. Chairman Ben S. Bernanke meets today with Senate Republicans, before testifying on the economy at a congressional hearing Feb. 14. Fed Governor Frederic Mishkin, Chicago Fed chief Charles Evans and San Francisco Fed President Janet Yellen also speak.

``My judgment is that most of the time, the committee cannot provide what the market wants because the committee itself is not clairvoyant,'' he said in his speech. ``No one knows how the economy is going to evolve and how events will change the appropriate setting of the federal funds target rate.''

Poole dissented from the Federal Open Market Committee's Jan. 21 emergency decision to lower the benchmark rate by three- quarters of a percentage point, preferring to wait until the Jan. 29-30 meeting. He isn't a voting member on the FOMC this year, though he participated in the Jan. 21 meeting as that roster was based on 2007 voters.

Futures traders are placing 66 percent odds that the Fed will need to lower its main interest rate further, to 2.5 percent, at the next policy meeting on March 18.

The economy expanded at a 0.6 percent annualized pace in the fourth quarter, matching the slowest rate in five years, after growing at a 4.9 percent pace in the prior three months. Wall Street firms including Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co. predict a recession this year.

Job Loss

The U.S. lost jobs in January for the first time since August 2003, and service industries shrank more quickly than any time since the last recession, reports showed in the past two weeks. Government figures on Feb. 12 may show that retail sales slid 0.3 percent, the second straight decline.

There will be more ``shoes to drop'' if employment falls further, Poole said yesterday.

Fed officials have noted that inflation is faster than they prefer. The personal consumption expenditures price index excluding food and energy increased by 2.7 percent over the past three months, Yellen said last week.

Higher energy prices may be creeping into core inflation, and yet inflation expectations are virtually unchanged, Poole said, citing the yield spread between 10-year Treasuries and 10- year TIPS, or Treasury inflation-protected securities.

`Sticky Shoes'

``So far, we're standing with very sticky shoes on that slippery slope'' of inflation expectations, he added.

Dallas Fed President Richard Fisher, who alone voted against the Jan. 30 half-point rate cut, warned in a Feb. 7 speech in Mexico City that aggressive rate cuts may ``juice up'' inflation.

Poole also said that his business contacts report they're not optimistic about the economy. ``My sense is things are slow,'' Poole said. ``People are not as optimistic or buoyant as they were.''

``Those companies and industries directly connected to housing are in somewhat of a retrenchment mode,'' Poole said. ``But they're not in a survival mode. They're worried about profitability. They're not worried about survival. There is a big difference.''

Poole is a former professor and chairman of the economics department at Brown University in Providence, Rhode Island. No final decision has been made in selecting his successor, the bank president said.

BLOOMBERG