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14, 1996
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Slow U.S. growth causes housing decline
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M i l I EK
A senior Federal Reserve policy­
maker said Tuesday he saw signs the
economy may be slowing from its
hectic second quarter pace, but add­
ed that the central bank needed to be
vigilant because risks remained.
“We have to be on our guard," Fed
Gov. Edward Kelley said in an inter­
view. “The upside risks are certainly
there, coming o ff a stiong second
quarter."
The central bank is hoping that the
economy will slow to a more sustain­
able rate o f growth in the months
ahead in order to keep inflation in
check and thus extend the expansion.
The economy grew at a 4.2 per­
cent annualized pace in the second
quarter — its fastest rate in two years.
“W e’re obviously coming out o f
the second quarter with very strong
momentum,” Kelley said. “ It may,
repeat, may be that we are seeing a
slowing that could relieve some o f
that upside pressure,” he added.
Housing sales slipped in June.
Automobile sales were down in July.
Retail sales have a “soft tone" and
construction seems to be slow ing after
an Olympics-driven surge, Kelley
said.
Stock and bond markets raced
ahead last week as investors bet that
a spate o f statistics showing slowing
growth would convince the Fed not
to raise interest rates at its next pol­
icy-making meeting on Aug. 20.
But Kelley's remarks suggest that
he has yet to make up his mind about
whether a rate increase will be need­
ed.
“I’m workingon it," he said, when
asked if short-term interest rates were
at an appropriate level given the state
o f the economy.
After cutting rates by a quarter
percentage point in January. the cen­
tral bank has held monetary policy
steady as growth first waned, then
waxed.
The Fed has not raised the federal
funds rate
the rate that commer­
cial banks charge each other for over-
night loans
since February 1995.
Ihe rate now stands at 5.25 percent.
Kelley said that the performance
o f inflation to-date had been “very
favourable," and added that he did
not see any signs it was about to
break out higher.
After stripping out volatile food
and energy prices, consumer prices
rose at a year-on-year rate o f 2.7
percent in June.
I he Fed governor said the central
bank will closely scrutinise upcom­
ing producerand consumerprice data
for July for any signs that inflation­
ary pressures are building up.
“We do see pressures in things
like labour markets,” he said. "In
other areas, there has not yet been an
emergence o f pressures. Commodity
markets generally have been benign.”
Kelley called the labour market
"the most obvious area o f potential
concern” about inflation.
I f companies start bidding up wag­
es in order to attract employees, that
could lead to higher inflation if it is
not matched by increased worker
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o f fifteen employees from through­
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productivity
Non-farm payrolls expanded by
193,000 last month Although that
growth was somewhat slower than
the previous month’s 220,000, it still
was what Kelley termed a “strong
number.”
“It is clear that the labor market is
becoming tighter and tighter,” he said.
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