Fed: Y2K recession unlikely

A top Federal Reserve official yesterday played down the possibility that computer problems at the turn of the century could push the United States into a deep recession but conceded that the problem was unlike any the nation has faced before.

In prepared remarks before an economic symposium in Houston, Fed governor Edward Kelley said he was "cautiously optimistic that the millennium bug will not cause major economic disruptions when it bites."

Kelley acknowledged that there will be some impact on the U.S. economy, stemming from concern over the effectiveness of worldwide efforts to reprogram computers so that they handle dates properly after December 31, 1999. "We really have no previous experience with a challenge of this sort to give us reliable guideposts," he said.

"Uncertainty about the ultimate effectiveness of Y2K remediation programs already is affecting corporate investment and production plans and obviously will be with us until at least January, 2000," Kelley said.

He said public uncertainty was related, in part, to the lack of understanding of the problem, one that is cloaked in the arcane language of software and embedded chips.

"As such, it was difficult at first for senior management in the corporate world and the public sector to recognize the serious nature of the problem," he said.

Another complicated aspect of the so-called millennium bug is the interrelated character of many computer systems. An individual company may be satisfied that it has done all it can to fix its own systems, Kelley said, but still may feel very vulnerable to the actions taken by its suppliers and customers.

Because this situation is both complex and fragmented, it is difficult to quantify the aggregate costs of Y2K repairs. "Similarly and perhaps more importantly, we also have no national scorecard on how effective our economy is being in our remediation efforts," Kelley said.

He said inventory building was likely to increase next year as insurance against potential supply shortages, which will boost orders and production in 1999. But stockpiled goods then would be sold off in 2000 so that "the net effect on the aggregate economy probably is negative," Kelley said.

The Fed also was prepared to counteract any serious effects on the economy. "We will...be ready if people want to hold more cash on New Year's Eve 1999, and we will be prepared to lend whatever sums may be needed to financial institutions through the discount window under appropriate circumstances to provide needed reserves to the banking system," Kelley said.

Citing estimates made public by his institution earlier, he said the private sector might spend about $50 billion over the next two years to tackle the problem. This figure is based on corporate filings with the SEC, as well as the central bank's estimates for firms that either are private, did not discuss Y2K expenditures, or stated that their Y2K programs were not having a "material" effect on their bottom line.

Although he said the Federal Reserve has updated its research using the latest quarterly reports, and the $50 billion estimate seems to be on the mark, he fully expects to see the figure rise over time.

The U.S. central bank, which controls monetary policy, can reduce interest rates to make it cheaper to borrow and so encourage consumer demand.

Reuters contributed to this report.