Oil troublesome but recovery intact -Fed's McTeer
Mon Aug 23, 2004
WASHINGTON, Aug 23 (Reuters) - Record oil prices are creating headwinds for the U.S. economy but do not place its recovery at risk, Dallas Federal Reserve Bank President Robert McTeer said on Monday.
"I think it's self-sustaining and it's not terribly fragile ... It is in a little soft spot right now and I wish it would strengthen. But I don't think it's in jeopardy," he told CNBC television in an interview.
Evidence of a soft spot has been clear since second- quarter growth slowed sharply as consumers became alarmed by higher energy costs and it continues to be a worry after oil prices hit a record just below $50 a barrel on Friday.
McTeer argued that oil prices were much lower in real terms than during the 1980s oil crisis, but he acknowledged they were a drag on growth.
"Petroleum products are in many, many things, and it is very important and it is troublesome, both in adding to price pressures and in adding to weakness overall."
But he noted it was just one of the factors weighed by the U.S. central bank as it sets interest rates.
He also stressed that rates remain very low, despite two increases of a quarter-percentage point each since June, when the Fed began raising interest rates for the first time in four years.
"The Fed has not really tightened monetary policy in any strict sense. It's reduced its degree of accommodation. The target fed funds rate is still only 1.5 percent -- extremely low," he said. "The target fed funds rate is still negative or close to zero in real terms."
The fed funds rate, which is the rate banks charge each other for overnight loans, affects credit costs throughout the economy.
Analysts predict the Fed will keep raising rates to 2.0 percent by the end of the year. But they have begun wondering whether it would pause at its next policy-setting meeting, on Sept. 21, to ensure it does not choke off growth.
McTeer, though, made the point that the spike in oil prices was caused not by a break in supplies -- which economists see as a deadly risk to the world economy -- but because growth in nations like China and the United States is very solid.
"It is very different if your oil prices are high because of a cutback in supply or whether they're high because of demand and in this case, it's clearly demand-driven," he said.
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