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Fed sees `subpar' growth in US

Much of the US expanded at a "subpar" pace after the end of fighting in Iraq, the Federal Reserve said in a report that some economists said supports Wall Street expectations for an interest rate cut this month.

Half of the Fed's 12 districts reported "sluggish, subpar or subdued economic growth" in the central bank's latest survey of regional economies, known as the beige book. The Dallas, Kansas City, New York, and Minneapolis Fed districts reported signs of improving economic growth, and the Philadelphia and Cleveland Fed banks reported mixed conditions.

The anecdotes are in line with Fed Chairman Alan Greenspan's assessment of the economy when he told an international monetary conference last week that the US economy had "stabilized" while a period of stronger growth has "not yet begun."

Vice Chairman Roger Ferguson today said there is no evidence that improving financial conditions have resulted in stronger growth.

"The unwinding of war-related concerns appears to have provided some lift to business and consumer confidence, but most reports suggested that the effect has not been dramatic,'' the survey said. No district suggested its economy had deteriorated since the last survey on April 23.

Fed policy makers will use today's survey of anecdotes and data as a reference when they meet June 24 to 25 to review the benchmark overnight bank lending rate. Wall Street's biggest bond-trading firms are unanimous in predicting a cut of at least a quarter-point in the rate, which at 1.25 percent is already the lowest since 1961.

The Fed's latest regional report, compiled by the Federal Reserve Bank of Dallas as of June 2, provides a look at the economy in the weeks following the end of major fighting in Iraq.

Fed officials have suggested that heading off price declines, or deflation, is becoming a priority. Traders interpreted Greenspan's comment last week that the "cost of addressing" a deflationary risk is "very small" as signaling a rate cut.

The Fed is "concerned about deflation, and they are concerned about growth below potential," said Michael Moran, chief economist at Daiwa Securities America, a primary dealer in US Treasuries. "They are going to be willing to ease monetary policy."

The US economy grew at a 1.4 percent annualized rate in the final quarter of last year and at 1.9 percent in first quarter of this year. US Treasury Secretary John Snow said last night he expects growth of about 3.5 percent in the second half.

"We do feel like the economy is running along the bottom now," Rick Wagoner, chairman and chief executive officer, said after a speech in Detroit. "More of the signs that may foretell an uptick are ... a little better than they were six months ago."
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