U.S. central bankers try to dim hopes

On Friday, in advance of a major speech on the economy by Alan Greenspan, the U.S. Federal Reserve chairman, several Federal Bank governors warned investors not to expect too much too soon.

"I think there's a good chance that the economy may be at least a little softer than the consensus over the next year or so," said Alfred Broaddus, president of the Richmond Federal Reserve Bank.

Click the link on the top right to read the latest speech from Alfred Broaddus given 8 January 2002.

"In either case, we'd see a more gradual recovery from the recession than in most other post-war business cycles."

Mr. Broaddus, who is a non-voting member of the Federal Reserve, said he expects that the consensus among economists of a recovery by mid-next year appears to be the most probable outcome, a position echoed by Anthony Santomero, president of the Philadelphia Federal Reserve bank. Mr. Santomero, in a speech in Philadelphia, said that record low interest rates should soon start stimulating the economy. The Fed has cut rates 11 times in the past year and hinted that the Fed may not move again next week to cut rates one more time.

Mr. Santomero did not rule out another cut of the key Fed rate, now at a 40-year low of 1.75%, if consumer spending erodes and there is no resumption in business investment.

"Given the uncertainty, we must remain flexible and open as to what is required going forward," said Mr. Santomero.

He said the most recent U.S employment report showed "somewhat more positive evidence of a foundation for a recovery."

The sharp drop in business investment spending was blamed by another key Fed official, Roger Ferguson, its vice-chairman, who said that the key sector "must at least stabilize and not be a drag on economic growth."

And, in an unusual warning, he told Wall Street not to read too much into the "balance-of-risks" statement put out by the Fed after a regular meeting of the Federal Open Market Committee.

Economists said the bank governors appear to be setting the stage for Mr. Greenspan who is giving his next comments on the economy in San Francisco.

"We think the Fed wants to temper those expectations and keep interest rates low as long as possible to help lift the economy," said Gemma Wright, market strategist for Barclays Capital Group.

The comments from the bank governors come as a large decline in demand for military airplanes pushed factory orders down in November.

The Commerce Department said factory orders fell by 3.3% in November although once non-defence orders were stripped out, orders rose by 5% for the month.

That is at least an indication of inventory sell-out in the battered manufacturing sector, where some 1.3 million jobs representing 7% of the factory workforce, have been laid off last year.

"Even though the order book was weak in November, the rise in the orders index for December suggests that manufacturers are starting to recognize that inventories are becoming overly lean," said Stan Shipley, a senior economist with Merrill Lynch & Co. in New York.