Sunday, September 2, 2007

President of NBER Wants the Fed to Cut the Fed Funds Rate by 1% to Avoid Recession

The following is an article from Bloomberg concerning a speech given by Martin Feldstein, President of the NBER, the people that define recessions. Dr. Feldstein basically wants the Fed to cut the Fed Funds rate by 1% in the hopes of avoiding a recession. From any other source you may disregard this request as so much self-serving rhetoric. For example, may be the guy has a hedge fund to save. But, Martin Feldstein is head of the outfit that defines when a recession starts and stops. What is he seeing in he tea leaves that the rest of us do not see?

Harvard University economist Martin Feldstein said the U.S. housing slump threatens a broader recession, and the Federal Reserve should lower interest rates.

``The economy could suffer a very serious downturn,'' Feldstein, head of the group that charts America's business cycles, told a Fed conference in Jackson Hole, Wyoming, yesterday. ``A sharp reduction in the interest rate, in addition to a vigorous lender-of-last-resort policy, would attenuate that very bad outcome.''

Feldstein made a case for lowering the overnight lending rate between banks to 4.25 percent from 5.25 percent to cushion the economy from the fallout of defaults on subprime mortgages.

Chairman Ben S. Bernanke told the same gathering on Aug. 31 that the Fed will do what's needed to stop the past month's credit- market rout from ending the six-year expansion.

Lowering interest rates may result in a ``stronger economy with higher inflation than the Fed desires,'' a situation that Feldstein described as the ``lesser of two evils.''

``If that happens, the Fed would have to engineer a longer period of slow growth to bring the inflation rate back to the desired level,'' said Feldstein, 67, president of the National Bureau of Economic Research. Some investors speculated that Feldstein was a candidate for Fed chairman before Bernanke was picked to succeed Alan Greenspan.

Bernanke wasn't in the room for Feldstein's speech, though most other Fed officials were, along with central bankers and economists from around the world who traveled to the annual mountainside conference hosted by the Kansas City Fed bank.

``Marty is a guy of good judgment,'' said former Fed Governor Lyle Gramley, who attended the event. ``Everybody in the room recognizes that. Everybody, including the people at the Fed, will think carefully about what he said.''

The U.S. economy expanded at a 4 percent annual rate in the second quarter, the fastest pace in more than a year, before turmoil in the credit markets forced the Fed to warn in an Aug. 17 statement that risks of slower growth had increased ``appreciably.''

Already, some indicators are suggesting a weakening economy. First-time applications for jobless benefits rose to the highest level since April in the week ended Aug. 25. Property values in 20 metropolitan areas fell 3.5 percent in June from a year earlier, according to an Aug. 28 report by S&P/Case-Shiller.

The economy was last in recession from March to November 2001, according to NBER.
Feldstein outlined a ``triple threat'' from housing: a ``sharp decline'' in home prices and construction; higher borrowing costs and a ``freeze'' in credit markets stemming from subprime-mortgage losses; and fewer home-equity loans and refinanced mortgages, leading to less consumer spending.

Investors expect the Fed to cut the federal funds rate on overnight loans between banks to 5 percent on Sept. 18 and at least another quarter-point by year's end. The central bank has left the rate at 5.25 percent since June 2006 after raising it from 1 percent over a two-year period.
Gramley, a senior economic adviser at Stanford Group Co. in Washington, said he was surprised by the gloominess of Feldstein's 25-minute speech, which capped a conference where many participants were pessimistic.

Kansas City Fed President Thomas Hoenig, speaking briefly after Feldstein, said the symposium gave him and probably his colleagues ``a lot of useful information to use as we deal with some difficult issues that confront us all.''

Earlier in the day yesterday, Fed Governor Frederic Mishkin presented a paper in which he said that U.S. banks can cope with ``stressful'' conditions and that the financial system is in ``good health'' even with the disruptions of the mortgage market.

Mishkin also reiterated that policy makers should avoid setting interest rates according to swings in the housing market and respond ``only to the extent that they have foreseeable effects on inflation and employment.'' That point was challenged by some participants, including Bank of Israel Governor Stanley Fischer.

Feldstein had said in an interview on Aug. 31 that there is a ``significant risk'' of a downturn and urged the Fed to cut borrowing costs.

Feldstein is a member of the Business Cycle Dating Committee of the NBER, which like Harvard is located in Cambridge, Massachusetts. The panel includes six other economists and is chaired by Robert Hall, an economist at Stanford University's Hoover Institution.

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