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Fed official questions need for more rate cuts

/ Source: The Associated Press

Additional interest-rate cuts may not be warranted unless the sluggish U.S. economy slumps more than expected over the next several months, Federal Reserve Bank of Richmond President Jeffrey Lacker said Tuesday.

Lacker also cautioned that the risk of inflation may curb his support for additional rate cuts in a speech to West Virginia bankers. The Federal Reserve has reduced its key interest rate to 3 percent in recent weeks.

“The longer we go experiencing only upside inflation misses, however, the more we risk losing the credibility we have fought so hard to maintain,” he said.

He also declined to comment on the advisability of using the tax rebate being debated in Congress to stimulate the economy. However, he said any boost from consumer spending likely would come at the expense of economic growth in early 2009.

While the risk of a recession has increased, fairly weak economic growth remains a more likely scenario for 2008, he said.

“My sense is that we will see sluggish growth for at least half a year before a gradual firming begins,” Lacker said. “If job growth is positive in the months ahead, and if wages can stay ahead of inflation, the income growth should be sufficient to support consumer spending gains and allow us to skirt the boundary of recession.”

If there is a recession, Lacker suggested it would be mild, though the economy would recovery slowly.

Lacker pegged the likelihood of a recession to business investment and the job market. Business investment is likely to slow from last year’s 10 percent pace as companies cut back on construction and other big-ticket projects, while job growth is likely to be lethargic at best, he said.

He also expects the U.S. housing market will struggle throughout the year.

The nation’s economy should benefit from the weak U.S. dollar. High ocean freight prices and other factors have boosted exports of commodities such as coal from West Virginia and other eastern states.

“I expect the trade deficit to continue to narrow, providing modest support to real” gross domestic product growth, Lacker said. “On the other hand, we are hearing reports of unexpectedly low tax revenues in the state government sector.”