The Fed's Wet Blanket

Trying to contain expectations of a quick economic recovery fueled by recent reports and forecasts, Federal Reserve officials said yesterday they expect a “modest and gradual recovery in the economy next year” rather than the quick turnaround many investors and forecasters now say they're expecting.

“I am of the opinion that the recovery will not begin until mid-2002,” said Anthony Santomero, president of the Federal Reserve Bank in Philadelphia. “I think forecasters are overly optimistic.”

Many private economists had been predicting lately that the rebound would begin no later than the spring of 2002, and perhaps much earlier. Just yesterday, positive economic reports on consumer spending and construction in October were hailed as signs that the economy might be bouncing back from its first recession in 10 years. Spending increased a record 2.9 percent during the month and construction of houses, offices and government projects was up 1.9 percent. Most financial wisdom was expecting drops in both indices. “Economic recovery will be apparent in the first quarter of 2002,” crowed an investment officer at PanAgora Asset Management, “though the actual recovery is already underway.”

Fed officials did say they saw evidence that the recession could be coming to an end relatively soon. But most stressed their beliefs that the turnaround was likely to be slow in getting off the ground and that any real recovery might not get underway in earnest until next summer. Many insisted the recovery will not happen until capital investment rebounds. Considered one of the prime drivers of the late-1990s boom, it fell off considerably last year, a victim of companies'efforts to improve efficiency and profitability.