Fed Officials Diverge on Economic Risks, Interest-Rate Response
Federal Reserve policy makers diverged on their assessments of interest rates and economic risks, with some highlighting dangers of a deeper slowdown and others stressing the need to maintain credibility on inflation.
Boston Fed Bank President Eric Rosengren, among five officials who spoke yesterday, said central bankers “may consider taking out some insurance against'' slower growth. By comparison, Chicago Fed President Charles Evans said officials can make clear their commitment to stable prices by “promptly'' reversing cuts when the “insurance'' is no longer needed.
The comments reflect the difficulties at a central bank trying to avert a recession and stabilize financial markets while coping with surging oil and food costs spurring consumer prices. Chairman Ben S. Bernanke acknowledged to lawmakers Feb. 28 that inflationary “stress'' is “complicating'' Fed policy.
“There is pretty universal acceptance of the seriousness of the problem and that policy has a role to play'' in reviving growth, said David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. Talk by some officials about raising rates “is a way to try to validate their inflation-fighting concerns,'' he said.
The dollar fell and commodity prices climbed to records this week after Fed Vice Chairman Donald Kohn said reviving growth is a bigger priority than containing inflation, a message Bernanke reinforced in semiannual testimony before Congress. The dollar touched $1.5239 per euro, the lowest ever, gold advanced as high as $976.32 per ounce, and crude oil reached a high of $103.05.
Hit to Growth
Rosengren, Evans, St. Louis Fed chief William Poole and Fed Governor Frederic Mishkin addressed a monetary policy forum yesterday in New York, where economists presented a study concluding that credit losses may damp growth by 1.3 percentage point over the next year.
Mortgage credit losses may total $400 billion, with about half that amount falling to U.S. financial institutions, according to the study, written by analysts including Greenlaw and Goldman Sachs Group Inc. chief U.S. economist Jan Hatzius.
“Monetary policy is a balancing act, with dangers of recession and inflation both very real,'' said Poole, who retires this month. Still, “if inflation develops while the FOMC is concentrating on avoiding recession, the consequence will be to delay recession but not to avoid it.''
Traders now judge that a cut of 0.75 percentage point in the Fed's main interest rate at or before the March 18 meeting is more likely than a half-point move, by a 70 percent to 30 percent margin, based on futures prices. The chance of such a large reduction jumped from 2 percent a week ago no checking account payday advance.
Credit Losses
U.S. stocks tumbled and Treasuries rallied yesterday after a report showed business activity fell to the lowest level since 2001 and UBS AG said losses in credit markets may top $600 billion.
“I would characterize the current state of affected financial markets as evolving positively but still fragile — in other words, unusually vulnerable to shocks,'' Dennis Lockhart, president of the Atlanta Fed, said in a panel discussion in Atlanta on subprime mortgages. “Resolution of the current financial market problems requires some stabilization of U.S. housing markets.''
Lockhart also said lower interest rates should help the U.S. economy accelerate later this year.
“Let's hope they don't wait too long'' to tackle inflation, Carnegie Mellon University economist Allan Meltzer, author of a history of the Fed, said in an interview with Bloomberg Television. He faulted some Fed officials for the “mistake'' of adopting the approach that “we're going to solve one problem and create another, and then we're going to try to solve that.''
`Timely Manner'
Bernanke said in congressional testimony this week that the Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.'' Kohn said Feb. 26 that turmoil in credit markets and the possibility of even slower growth pose a “greater threat'' than inflation.
Evans's comments reflected the assessment of some officials at the Jan. 29-30 meeting that once the economy recovers, the Fed may need to raise rates at a “rapid'' pace, according to minutes of the gathering. They follow expressions of concern by lawmakers this week to Bernanke that lower rates may stoke inflation.
“You always have to be mindful that when you take an action to mitigate one risk, then conflicting risks are being elevated,'' said Evans, 50, the newest Fed bank president, having been promoted in September from Chicago Fed research director.
Rosengren placed a different stress in his remarks, saying that “one of the significant downside risks to the economy is that further declines in housing prices could depress residential investment, reduce consumer spending, generate elevated foreclosures, and contribute to financial instability.''
Taking “appropriate'' actions to reduce that risk “seems prudent,'' said Rosengren, who is also 50 and took office last year.