Fed hopeful on economy, wary of risks

Federal Reserve officials signaled confidence the U.S. economy was improving after its first recession in a decade but remained guarded about the pace of growth. The remarks by Fed Vice Chairman Roger Ferguson and Alfred Broaddus, president of the Richmond Fed Bank -- coupled with the central bank's anecdotal "Beige Book" report -- reinforced a conviction the Fed will leave U.S. interest rates steady at its upcoming May 7 meeting or perhaps longer. "The outlook...has brightened: Industrial output has begun to turn up and various surveys of business conditions suggest that orders are rising," Ferguson told the House of Representatives Committee on Small Business. "These developments are encouraging signs, but they are no guarantee that a sustained solid expansion of final demand has gained traction, and we will be monitoring economic developments closely in coming months," he said. Ferguson called the current 1.75 percent federal funds rate "accommodative" and said monetary policy had "substantially cushioned" the blows that hit the economy last year. The U.S. economy slid into recession in March 2001, a slump triggered by sharp cutbacks in business spending and worsened by the Sept. 11 attacks on the United States. Attempting to ease the economy's woes, the Fed cut the bellwether fed funds rate 11 times to its current 40-year low. POLICY IS 'ACCOMMODATIVE' TO GROWTH The fact that Ferguson and other Fed officials, including Chairman Alan Greenspan, have pointedly described the current interest rate level as "accommodative" has fueled expectations that eventually, the Fed will start to bump rates higher. But Greenspan and his colleagues have lately been giving indications that they would like to have a clearer sense of the strength of the U.S. economic recovery before they begin pushing up borrowing costs. "I think we need additional information to really have a clearer understanding (of the pace of the recovery)," Broaddus, who is not a voting member this year of the rate-setting Federal Open Market Committee, told reporters after speaking to a risk-management group in Falls Church, Va. "I think we (Fed officials) all expect continued recovery. The question is how strong the recovery is going to be," he said. Some additional reasons for caution emerged on Wednesday after the government reported that orders for costly durable goods fell more than expected. Orders for U.S. durable goods -- items like cars and machinery built to last three years or more -- fell 0.6 percent in March after an upwardly revised 2.7 percent gain in February, the Commerce Department said. Commerce also said the pace of new-home sales slowed in March, falling 3.1 percent to an annual rate of 878,000. The periodic Beige Book report from the Fed, which brings together anecdotal information from all regions of the country, echoed the messages of Ferguson and Broaddus, citing some concerns about the speed of the fledgling economic expansion. "Almost all Federal Reserve Districts reported signs of improvement or actual increases in economic activity since the last survey," the Fed said. "While the overall tone was positive, a few districts expressed qualifications about the pace of the recovery or the strength of their regional economies," the central bank added. Fed decision-makers will mull the report, along with other economic data, when they meet on May 7.