Fed’s Split View on Rate Reductions

What bothers me about this rate decision is that if the Fed drops the rate the business community will take it as a signal that they are being “bailed” out, when in fact it is purely a monetary policy issue. The business community does not appreciate how serious the economic situation in the US is and as usual they are just looking at their bottom line. Note that a rate cut in September will not really help out the people with mortgage problems, it is being done to stimulate the economy. Personally, I believe that a rate cut is probably already too late. From Bloomberg.

Federal Reserve Governor Frederic Mishkin joined San Francisco Fed President Janet Yellen in flagging an increasing threat to consumer spending, differing with officials who still see signs of economic strength.

Mishkin said late yesterday in New York that ``heightened uncertainty'' in markets could hurt consumers, after Yellen said demand is under ``downward pressure.'' By contrast, Dallas Fed President Richard Fisher was ``generally encouraged'' about the economy, and Charles Plosser of the Philadelphia Fed said Sept. 8 there are ``a lot of conflicting data.''

The scope of remarks may reflect debate inside the central bank over whether to lower the benchmark interest rate on Sept. 18 by a quarter-percentage point, or a half-point as some investors expect, Fed watchers said.

``They might be legitimately still debating, even with the market way out in front of them,'' said Chris Rupkey, a senior financial economist at Bank of Tokyo Mitsubishi UFJ Ltd., who was present at Mishkin's address to the Money Marketeers of New York University. ``The Fed is a very deliberative body.''

Rupkey said there's no ambiguity in the Treasury market, with the two-year note yield at 3.84 percent, indicating traders anticipate a series of rate cuts. The yield is more than 1.25 percentage points below the Fed's 5.25 percent target rate for overnight loans between banks.

Policy makers are trying to gauge the economy's state after the first loss of jobs in four years in August. Atlanta Fed President Dennis Lockhart said the data now show that job growth started slowing in June. In an Atlanta speech yesterday, he backed away from remarks he made four days before that the housing slump was having a limited impact.

``It sounds like everyone's marked down their growth outlook, and everyone realizes the credit-market events are something that require a Fed response,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York who used to work at the Fed. ``It's just a question of magnitude.''

Employers cut 4,000 workers in August, the Labor Department said Sept. 7. Revised figures showed job gains diminished from a 188,000 pace in May to 69,000 in June and 68,000 in July. Mishkin said private payrolls growth has slowed to 70,000 on average in the past three months, from 165,000 in the second half of 2006.

Payrolls are one of the main indicators, along with sales, wages and production, which help determine the start of economic contractions.

Mishkin and Yellen acknowledged some areas are doing better than others. Consumer and business spending appear to be holding up ``reasonably well'' based on some recent indicators. They indicated that the risks to the outlook would sway their decision on rates.

``It is critical to take a forward-looking approach -- gauging the effects of recent developments on the outlook, and, importantly, the risks to that outlook,'' Yellen said in a speech to a conference in San Francisco. Yellen, 61, is a former Fed governor and head of the White House Council of Economic Advisers in the Clinton administration.

Mishkin said that outside of housing, growth ``could be affected more severely in other sectors should heightened uncertainty lead to a broader pullback in household and business spending.''
``That scenario cannot, in my view, be ruled out, and I believe it poses an important downside risk to economic activity,'' said Mishkin, 56, who joined the Fed Board a year ago.

Others played down the surprise loss of jobs, which economists said indicated that the sell-off in credit markets and deepening recession in housing is having a broader impact.

``Our economy appears to be weathering the storm thus far,'' Fisher said yesterday in a speech in Laredo, Texas. ``As yet, tighter credit conditions do not appear to have had a major impact on overall economic activity outside of real estate.''