Fed doesn't know when U.S. economy will rebound

Marjorie Olster, Reuters, New York

Senior Federal Reserve officials acknowledged on Tuesday they did not know how long it would take the U.S. economy to recover from its current slump.

Although the central bankers were optimistic about the longer- term prospects, they need more time to assess the full economic impact of the Sept. 11 attacks on the World Trade Center and the Pentagon that killed more than 5,000 people.

"If the extent of the economic damage inflicted by the attacks is unknown at this point, so too is the length of time before aggregate economic growth picks up," Federal Reserve Vice Chairman Roger Ferguson told a Bond Market Association conference in New York.

Richmond Fed President Alfred Broaddus, speaking in North Carolina, said: "While there will continue to be substantial uncertainly regarding the near-term path of the economy over the next several months as a result of the blow we have received, I am very confident that we are building a solid foundation for a strong recovery over the longer term."

Private economists widely believe the economy is now in a recession, but the Fed has not yet said so. The central bank may just be waiting for the data to catch up to the forecasts.

A recession is typically defined as six months of contraction in gross domestic product and the consensus is that GDP will decline in both the third and fourth quarters of this year.

Ferguson said private economists are forecasting a recovery early next year, but that will depend in large part on what happens to household and business confidence.

A combination of new fears about personal safety, growing job cuts and a dimming economic outlook are taking a toll on American confidence.

"Spending appears to be recovering from the initial cutback, but of course it is too early to assess how great the influence will be in the medium term," Ferguson said.

Struggling to avert a recession, the Fed has cut rates nine times this year by a total of 4.0 percentage points, including two half-point reductions since Sept. 11. Overnight lending rates now stand at a nearly four-decade low.

But Broaddus said Fed action alone will not be enough to counter the strong headwinds the economy faces. The Fed is counting on massive fiscal stimulus from the government to help bolster growth, along with easier credit. He also expressed concern that overshooting on rate cuts now could result in inflation once a recovery takes hold.

"I think we all recognize that lower interest rates alone can't meet all the economic challenges we face," he told local business leaders in Hickory, N.C.

Most top Wall Street firms expect the Fed to cut the benchmark federal funds rate on overnight bank lending, currently at 2.5 percent, to 2.0 percent by year end.

The latest data did nothing to allay recession fears. The Fed reported on Tuesday that industrial production fell 1.0 percent in September after a decline of 0.7 percent in August. It was the 12th straight month of declines, the longest streak since World War Two.

Housing demand, which has been one of the few sources of strength in a weakening economy over the past year, was also showing definite signs of ebbing.

The National Association of Home Builders' Housing Market Index, released on Tuesday, registered its sharpest drop in October since the inception of the index in 1985.