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. Last Updated: 07/27/2016

Fed Says U.S. Recovery Will Be Gradual, Mild

WASHINGTON -- Federal Reserve officials say they expect a modest and gradual recovery in the U.S. economy next year rather than the quick turnaround many investors and forecasters are expecting.

That suggests the central bankers are open to further interest rate cuts and may keep rates lower for longer than financial markets anticipate.

The officials said the recovery could be tempered by a variety of forces, from high levels of consumer and corporate debt to the reluctance of companies to invest in new factories and equipment at a time of uncertainty in the economy and the fight against terrorism.

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

Many private economists are predicting that a rebound will begin no later than the spring, and perhaps much earlier. Ian Shepherdson, an economist at High Frequency Economics, a consulting firm in Valhalla, New York, said he expects slightly positive economic growth in the current quarter, followed by a return to relatively healthy growth rates next year.

"I'm looking for a reasonably robust recovery that will surprise people with its speed and magnitude," Shepherdson said.

Chris Varvares, president of Macroeconomic Advisers, a consulting firm in St. Louis, said economic growth should resume in the first quarter of next year. "Our forecast is for what would be called a V-shaped recovery," he said, referring to the prospect that the downturn that began in March will be followed by a strong upturn soon.

Fed officials said they also see evidence that the recession could be coming to an end relatively soon. But in several interviews, some granted on condition of anonymity, most stressed their belief that the turnaround is likely to be slow in getting off the ground and that any real recovery might not get under way in earnest until summer. They suggested that the economy may end up being more sluggish than recent statistics suggest.

The main force inhibiting a strong comeback, Fed officials say, is the perception among businesses that the rates of return available to them from investing in new equipment remain too low. In this view, the economy will not get rolling again until capital investment rebounds.

Fed officials did not say whether they will cut interest rates for an 11th time this year when they meet next Tuesday, and Greenspan did not shed any light on his intentions on interest rates in a speech here Monday about globalization.

Greenspan also met for lunch Monday with President George W. Bush to discuss the economy. "The president was interested in listening to the chairman's points of view on the economy," said Ari Fleischer, the White House press secretary.