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Journalism of Courage
Three senior Federal Reserve officials said on Monday that the turmoil in housing and mortgage lending had begun to threaten the overall economy, a condition policy makers have said is the crucial test for deciding whether to lower interest rates at their meeting next Tuesday.
A Fed governor, Frederic S Mishkin, told an audience in Manhattan that the risk of a broader downturn “cannot, in my view, be ruled out” and “poses an important downside risk to economic activity.”
In unusually direct language for a Fed policy maker, Mishkin said inflation pressures had become less of a problem — a judgment that, if embraced by other Fed officials, would remove a major argument against lowering interest rates.
“I believe that the risks to the inflation outlook have become more balanced,” he said, “given the greater downside risks to real growth.”
Mishkin is a relatively new member of the Fed board, but he was a well-known specialist in monetary policy at Columbia University with longstanding ties to the chairman of the Federal Reserve, Ben S Bernanke. In 1997, while Mishkin and Bernanke were university professors, they wrote a book that called on central banks to base policy around a public target for inflation.
In speeches on Monday, two other Fed officials sent a similar message. Janet L Yellen, president of the Federal Reserve Bank of San Francisco, predicted that the housing decline would probably continue and would impose “significant downward pressure” on consumer spending.
Dennis P Lockhart, president of the Federal Reserve Bank of Atlanta, admitted that an unexpectedly bleak unemployment report on Friday had made him more worried about a downturn.
Neither Lockhart nor Yellen are currently voting members of the Federal Open Market Committee, which sets interest rates. But both sit in on the meetings.
On Wall Street, the debate among analysts was no longer about whether the Fed would reduce rates but by how much. Several analysts predicted that the central bank will lower the Federal funds rate, for overnight loans between banks, by half of a percentage point, to 4.75 per cent from 5.25 per cent. Until a few days ago, most analysts were betting on a quarter-point cut.
Fed officials in their comments said nothing about how much they wanted to lower rates. In Monday’s speeches, given before the central bank begins a weekl ong silent period ahead of its policy meeting, several made it clear they now see concrete risks of a downturn.
In Atlanta, Lockhart went so far as to retreat from a more optimistic stance he had taken a few days ago. He said on Thursday that he had not seen any “conclusive sings of weakness in the broader economy.” On Monday, he delivered the same speech but acknowledged that he had been jolted by Friday’s surprisingly dismal report that the economy had shed 4,000 jobs in August. “Friday’s new data show employment was beginning to soften back in June,” Lockhart said. “I am processing the information.” In her speech, Yellen said that a housing downturn and tighter credit were likely to cause “significant downward pressure” on consumer spending and thus on economic growth.
“The financial market turmoil seems likely to intensify the downturn in housing,” she predicted. Even if investors overcome some of their fears, mortgage rates are likely to remain higher on a long-term basis and could continue to push housing prices down. “Should the decline in house prices occur in the context of rising unemployment, the risks could be significant,” Yellen said.
Her comments highlighted a point recently stressed by Bernanke, that Fed officials do not plan to wait for irrefutable statistical evidence of an economic downturn. Rather, they are ready to act on warning signs, including anecdotal business reports, that the probabilities of a downturn are too high to ignore. The debate is far from over. Richard Fisher, president of the Federal Reserve Bank of Dallas, played down the importance of last week’s bleak employment report.
