Federal Reserve’s Confusion on Policy May Increase Economic, Housing Dangers

Good luck getting Federal Reserve officials to agree on how much the current level of interest rates is helping or hurting American economic growth.San Francisco Fed President Janet Yellen says the bank’s stance is now “mildly restrictive.” The Richmond Fed’s Jeffrey Lacker differs, arguing rates may be stimulating the economy. Even minutes of Fed meetings observe policy makers are finding it “quite difficult” to figure out what to tell the public.Resolving the confusion among Fed officials may determine whether the economy continues its five-year expansion. If the Fed is still juicing the economy, inflation will likely persist and require higher rates, which may in turn exacerbate a housing-industry slump and raise the risk of recession.“The issue is, do policy makers need a more significant movement into restraint?” the senior economist at Macroeconomic Advisers LLC in Washington and a former economist at the Fed’s Division of Monetary Affairs, Brian Sack, said. “The fact that a lot of policy makers wouldn’t even venture a guess as to whether they were in restraint or not, I think, itself is telling.”The Fed will keep the benchmark lending rate at 5.25% at its meeting of policy makers tomorrow, according to all 109 economists surveyed by Bloomberg News. The central bank lifted rates 17 times from June 2004 through June this year.Those who see rates as restrictive had their case bolstered today. In the last inflation report before the meeting, the Labor Department said prices paid to American producers rose 0.1% in August, less than economists forecast, while costs excluding food and energy fell by the most in three years. Separately, the Commerce Department said housing construction declined last month to the lowest level since April 2003.Mr. Lacker, 50, the lone dissenter from the 9-1 decision to pause on August 8, has indicated he may again vote against a move to leave the rate unchanged. The Philadelphia Fed’s board also signaled opposition by seeking an increase in the discount rate, which the Fed charges commercial banks for loans, days after Charles Plosser, 58, took over as president.One of Lacker’s reasons for last month’s vote: The so-called “real fed funds rate,” or the Fed’s main target adjusted for inflation, had declined and still lagged the level “typically associated with sustained expansions.”For years, economists inside and outside the central bank have struggled to define the “neutral” level of borrowing costs that lets the economy grow without stoking higher consumer prices. Former Chairman Alan Greenspan said in 2005 that “it is impossible to know with any certainty.”When reviewing the real fed funds rate, central bankers have used the overnight lending target minus the annual change in their preferred inflation gauge, the personal consumption expenditures index excluding food and energy, according to the latest available FOMC briefing books, which are from 2000.On that basis, the current real fed funds rate of 2.85% is lower than its level during any month from November 1994 through March 2001, a period when American growth averaged 3.6% a year and inflation ran at about 1.7%.Then, in the wake of the 2001 recession, the bursting of the Internet bubble and the stock market’s downturn, the Fed cut the benchmark rate, causing the real fed funds level to reach minus 1% in May 2004, the lowest since 1976.The low rates helped revive the economy, in particular housing, which after a boom has replaced stocks as the asset market subject to talk of a bubble. Even with a housing slowdown that has spilled over into the broader economy, though, the actual current rate may not be high enough to contain inflation.

Federal Reserve’s Confusion on Policy May Increase Economic, Housing Dangers

Federal Reserve’s Confusion on Policy May Increase Economic, Housing Dangers

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