Washington, October 25--The economy has pulled out of a midyear pause and should grow well for the rest of 2004, Federal Reserve Governor Susan Bies said on Saturday, adding that short-term interest rates were still "too accommodative."
While upbeat on the economy, the Fed governor had harsh words about government waste.
"I'm less worried about the tax side. The part that's got me so upset is in this whole election debate nobody's been talking about the spending side. If you take out Homeland Security and Defense, it has been a cookie jar in the last four years. Everything has gotten loaded in," Bies said when asked about the deficit after a speech to an investors group.
"Money has gotten loaded into these appropriation bills that are funding everything under the sun. There is absolutely no spending discipline," she added, urging a return to pay-as-you go rules to require new spending to be offset.
In her speech, Bies sounded optimistic about the economy's path. She said the Fed will keep an eye on how much surging oil costs affect consumer prices but said she expects underlying inflation to remain relatively contained.
This should let the Fed maintain a course of gradual steps to lift interest rates to more normal, or "neutral," levels. The central bank has raised its bellwether federal funds rate three times since June.
Answering audience questions, Bies said she was not certain where the neutral point lay.
"The neutral rate has got to at least be a rate where the rate minus inflation is a positive number. And with fed funds at 175 basis points, we're still negative, so we have to get it into positive territory. Now, where it needs to be above that, is a little bit tricky," the Fed governor said.
"We know we're too accommodative right now. We've got to get the rate of interest above the rate of inflation, but we don't know far exactly we have to go," she added.
The pace of economic growth will dictate the eventual level, Bies said, citing a continued overhang of unused production capacity and "a lot" of people looking for work -- indications growth is still not so fast it threatens to spark a big surge in inflation pressures.
"All in all then, we're feeling very good about the position of consumers, we're feeling good about the position of businesses, we're continuing to grow and and we think as we continue to move forward over the next few quarters, we'll have more people coming back to work," the Fed governor said.
"I believe we've gone through our soft spot that we had in the early spring and we're coming out of it in a positive way."
She brushed off fears about an unsustainable rise in housing prices, saying they were climbing on fundamentals such as demand and lean inventories.
However, she did concede there may be some overbuilding in some areas. She also called job gains "disappointing" with an average of 101,000 payrolls created each month since June.
Still, consumers and businesses are in good shape and should be able to cope with higher credit costs, she said.
"Although there are pockets of financial stress among households, the sector as a whole appears to be in good shape," Bies added, adding she was "considerably more sanguine" than some observers about household debt levels.
Companies have fixed balance sheets and cut costs, helped by low rates, but may have trouble keeping profits as strong as they have been once labor costs begin to pick up. Bies also predicted a moderation in productivity growth.
"But these developments and the decline in profit share are to be expected and will not, in my view, lead to a meaningful impairment of the financial health of companies," Bies said.
