Fed’s Raskin Says Economic Growth Likely to Remain ‘Modest’

Federal Reserve Governor Sarah Bloom Raskin said the economic expansion has been strengthening, while predicting its pace will remain “modest” in part due to weakness in the housing market and fiscal tightening.

“Of late, we have had some relatively encouraging economic news,” Raskin said today in the text of remarks given in Westport, Connecticut. Still, “the pace of expansion is likely to remain modest over coming quarters.”

The U.S. economy’s headwinds “have been easing, at best, only gradually,” and include a “very depressed” housing market, government spending cuts and tight credit conditions, she said. Raskin said in response to audience questions that in developing a plan to reduce the budget deficit, Congress needs to “balance long-term austerity” with a “need to not hinder a recovery” in the short term.

Fed Chairman Ben S. Bernanke said today in Washington that elevated unemployment and subdued inflation mean interest rates are likely to stay low, without offering any sign that the economy needs an additional monetary boost. Bernanke, in testimony to a Senate panel that is identical to his remarks yesterday to the House, described “positive developments” in the job market while saying it’s still “far from normal.” Joblessness fell to 8.3 percent in January, the lowest since February 2009.

“The pace of economic activity improved over the second half of the year as the drag on spending and production from high energy prices and temporary supply chain disruptions from the disasters in Japan and Thailand waned,” Raskin said.

Gathering Strength

Reports yesterday added to evidence that the world’s largest economy is gathering strength. Gross domestic product grew at a 3 percent pace in the fourth quarter, up from an initial estimate of 2.8 percent, the Commerce Department reported. The Institute for Supply Management-Chicago Inc. said its business barometer climbed to a 10-month high.

Even so, Bernanke repeated the Fed’s January statement that economic conditions are likely to warrant low interest rates at least through late 2014. That extended an earlier date of mid- 2013.

Raskin said that whether the increase in energy prices will translate into a “persistent inflation problem,” will depend on inflation expectations. “If, as I expect, inflation expectations remain stable in response to the recent run-up in gasoline prices, their influence on overall inflation should be limited as well,” Raskin said.

She acknowledged the criticism that the Fed’s record monetary stimulus “may limit the financial returns to saving for a time,” while saying households still benefit from the central bank’s efforts to spur growth. The Fed has kept its benchmark rate near zero since December 2008.

“The highly accommodative monetary policy now in place is intended to provide the support needed to strengthen the economic expansion and, over time, return the economy to sustainable rates of output growth, unemployment, and inflation,” Raskin said. “Ultimately our goal is an economy that is operating close to its potential and is producing jobs, income, and opportunities for investment that will lead to higher returns across a range of assets for savers and investors.”

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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