U.S. Economy on Central Bankers’ Minds

JACKSON HOLE, Wyo. —  Trade and foreign exchange rates are on the formal agenda for central bankers gathering this week in this resort town, but private talks probably will focus on the need to nurture a delicate U.S. economic recovery.

About 100 central bankers and economists from around the world, including Federal Reserve Chairman Alan Greenspan, are attending the Federal Reserve Bank of Kansas City’s annual three-day conference, which began Thursday.

“A key issue is the performance of the economy and the problems facing monetary policy if growth threatens to peter out,” said Lyle Gramley of the Mortgage Bankers Assn.

Recent U.S. statistics and weak money supply growth have left a measure of doubt about the vigor of the economy’s recovery from the recession that began in July, 1990.

When policy-makers convened in the shadow of the Grand Tetons last year with an agenda to discuss emerging market-oriented economies in Eastern Europe, it was two weeks after Iraq invaded Kuwait.

This year, the attempted Soviet coup and the ensuing turmoil in financial markets had threatened to upstage issues of macroeconomic and monetary policy.

But the unraveling of the coup means that those in attendance can focus on the subjects at hand and informally discuss issues such as the scandals at Bank of Credit & Commerce International and Salomon Bros. as well as the state of the U.S. economy.

An Aug. 2 employment report showing a 51,000 drop in July payroll jobs was followed four days later by the Federal Reserve’s move to push down short-term interest rates.

Since then, tame inflation readings and more tepid economic figures have been viewed as giving the central bank the scope to ease credit again.

When Fed policy-makers met Tuesday, many economists think they adopted a policy leaning toward more credit easing.

David Hale, chief economist at Kemper Financial Services Inc., said he believes that interest rates could be nudged down in the next three weeks but does not see it as a sure bet.

“The question is, ‘Will final demand falter and cause growth to drop to 1 or 2% in the fourth quarter?’ ” he asked.

Gramley, who is chief economist for the mortgage bankers group and a former Fed governor, said it is uncertain how much the economy will recover once inventory investment has moved back up into positive territory.

Moreover, weakness in the money supply remains a worrying question for policy-makers because it could hinder recovery.

Sluggishness in the money supply is a major puzzle, Gramley said. To what extent does it simply represent investors moving out of small-time deposits in search of higher yields and to what degree is it a symptom of banks’ reluctance to lend?

“You can’t very well react to it in a knee-jerk fashion, but you can’t turn your back on it either,” he said. “The rate of monetary and credit expansion is extremely weak.”

Meanwhile, a key topic for policy-makers is the increasing steps toward regional trade blocs.

While efforts for global trade agreements founder, regional trade blocs are on the march in Europe, Asia and in North America.

Delegates to Jackson Hole--including the Fed’s Greenspan, Mexican Finance Minister Pedro Aspe Armella and foreign central bankers--will review the implications of this for financial markets, macroeconomic policy and regulation of financial services.