Fed members believe monetary policy is at an 'appropriate' level

The Federal Reserve yesterday moved to rule out an unscheduled cut in interest rates ahead of its next meeting in September.

In what appeared to be a co-ordinated move, heads of the three regional reserve banks separately hinted that monetary policy was at an "appropriate" level. The speeches – from Philadelphia's Anthony Santomero, Chicago's Michael Moskow and San Francisco's Robert Parry – were the first comments from the Fed since it kept rates on hold at a four-decade low of 1.75 per cent last week. Although the speeches threw up differences of opinion, analysts said the thrust was to calm speculation of an imminent rate cut.

Stephen Lewis, chief economist at Monument Securities, said: "They are letting the market know they have taken on board the downside risks to the economy while at the same time justifying the fact they did not lower rates by pointing to positive trends in productivity.

"I think that they are hoping that if the market buys that story it should see them through until fairly close to the next [Fed] meeting."

The three regional bank presidents were unanimous in forecasting a period of modest and uneven growth over the coming months, rather than a "double dip" recession.

Mr Santomero, the only one of the three to hold a vote on the rate-setting committee, said he expected a slow acceleration in economic activity over the rest of the year with "healthy growth" in 2003. "The Fed's current monetary policy stance is appropriately supportive of the recovery process," he said. "I think it is most unlikely that we will move into a double-dip environment."

However he struck a doveish tone, saying the Fed's growth forecasts would be cut back and hinting that there were still uncertainties that made monetary policy difficult to predict.

Mr Parry, who becomes a voting member next year, was blunter, telling an interviewer: "Action on the part of the Federal Reserve is not called for."

He said he saw few signs of a credit crunch – where banks refuse to lend for fear of no return – although he saw signs that lenders were now more "critical".

Mr Moskow said he expected the US would be back at its potential long-run rate – about 3.0 to 3.5 per cent – within a few quarters. "The road to recovery is turning out to be bumpy [but] the Fed cannot, and should not, try to smooth out every bump," he said.

He echoed last week's Fed statement by saying that much of the blame for the recent slowdown was due to the accounting scandals on Wall Street.