johnnymk

Thu Mar 25, 2004 06:14 PM ET

By Pedro Nicolaci da Costa
NEW YORK (Reuters) - A swelling U.S. budget deficit threatens the economy, a top Federal Reserve official warned on Thursday, even as other policy-makers noted that strong growth would eventually trigger a rise in interest rates.

In his first major speech since taking the key central bank post, New York Fed President Timothy Geithner said the budget gap was all the more worrying, given the nation's large current account deficit, which requires an unprecedented amount of financing.

"The current deterioration in the U.S. fiscal position and the acute decline in the net national savings rate represent risks to the financial system and the economy as a whole," Geithner told a regional bankers' association.

He also noted that U.S. inflation was very low and the outlook was for only very modest prices rises ahead, but offered little in the way of hints on monetary policy.

That was hardly the case for his St. Louis counterpart, William Poole, who peppered his speech on Thursday with warnings about the need for an eventual hike in borrowing costs and sounded a stern warning on the prospect for inflation.

Fed Board Governor Donald Kohn took a more cautious stance, saying policy-makers should wait for "convincing evidence" of price stability and job market improvements before deciding to raise interest rates.

But Poole was much less circumspect, reiterating suggestions from other Fed officials that rock-bottom rates could not coexist with strong economic growth for too long.

"We do have to watch the data carefully and make sure policy does not remain accommodative beyond its time," Poole told reporters before speaking at LeMoyne-Owen College in Memphis.

A lack of job creation and persistent low inflation have given the Fed plenty of leeway in keeping official interest rates at 1 percent, the lowest in 46 years.

Yet Poole surprised many by saying the risk of a renewed bout of inflation outweighed the prospect of a surprise decline in prices, in direct contradiction to the Fed's policy statement last week.

Kohn, for his part, said he expected job growth to pick up "noticeably" in the coming quarters, echoing comments from Treasury Secretary John Snow on Thursday.

Speaking before Congress, Snow said job growth would return in the months ahead "at a very good clip."

Since both Poole and Kohn are voting members of the central bank's policy-making committee, their speeches taken together stoked speculation that the Fed may be one step closer to lifting interest rates.

That possibility seemed all the more plausible given a spike earlier on Thursday in the Fed's favored inflation measure, the core personal consumption deflator.

A part of the government's gross domestic product report, a low core PCE was one reason the central bank could promise to be patient on raising rates.

Analysts were taken aback when the price measure was revised up to show a 1.2 percent rise from the original 0.7 percent gain for the fourth quarter, prompting investors to sell bonds.

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Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. - Ronald Reagan (1986)

Merlin

With the unprecedented fiscal stimulus that has been injected into the economy over the past couple of years rates are going to have to go up sooner rather than later or else inflation will rear its ugly head. Our nation's current financial picture is quite ugly and cheap money will only hold off the inevitable for so long.

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