Poole, Bies Say More Fed Rate Cuts Wouldn
Former Federal Reserve officials William Poole and Susan Bies said it wouldn't be wise for policy makers to cut the benchmark U.S. interest rate below the current 2 percent.
“We have an adjustment in housing that has to take place,'' Poole, former president of the St. Louis Fed, said during a one- hour Bloomberg Television special, “Surviving the Slowdown,'' yesterday. “I do not think rate cuts are going to solve the basic problem.''
The Federal Reserve lowered the main U.S. interest rate yesterday by a quarter of a percentage point to 2 percent, saying the economy remains weak. The central bank has cut rates seven times since September to fuel economic growth and calm financial markets following the collapse of the subprime-mortgage market.
The former Fed officials' remarks underscore the risk that more rate reductions may fan inflation, which is accelerating because of rising prices of food, energy and other commodities. The Fed said “uncertainty about the inflation outlook remains high'' and indicated it's ready to pause its rate cuts by dropping a reference to “downside'' risks to growth.
“I really don't think the Fed should continue to cut,'' said Bies, a former Fed governor. Given the inflation rate, “the risk is it's taking away from people's spendable income.''
The Fed's preferred inflation barometer, the personal consumption expenditures price index, minus food and energy, rose at a 2.2 percent annualized rate in the first quarter.
Future Policy
Yesterday's statement announcing the rate reductions was “hardly a loud, clear signal'' of a pause, said Poole, who retired in March. “The Fed's efforts to hint about future policy have caused trouble, and the Fed has been burned by that.''
Policy makers have reduced the interbank lending rate 2.25 percentage points in 2008 with actions including two three- quarter point cuts and one half-point reduction.
The U.S. economy expanded at a 0.6 percent annual pace in the first quarter, the Commerce Department reported yesterday fast cash now paydayloans. The gain in gross domestic product was more than forecast and matched the rate of the previous three months. The last time the economy grew less was in the fourth quarter of 2002.
The gain in GDP, the sum of all goods and services produced, reflected an increase in inventories as consumers retrenched and companies cut investment. Spending by households, the biggest part of the economy, grew last quarter at the slowest pace since 2001, amid mounting job losses and surging food and fuel prices.
`General Disquiet'
“For 95 percent of Americans, I think it is a recession,'' said Roger Altman, co-founder of Evercore Partners Inc. “You see such general disquiet across the country.''
Business fixed investment, which includes spending on commercial construction and equipment and software, dropped last quarter at a 2.5 percent annual rate, the biggest decline since the first three months of 2004.
“It will be a slow recovery,'' Altman said.
The world's biggest banks and securities firms have reported $312 billion in asset writedowns and credit losses since the beginning of 2007 stemming from the decline in the mortgage market.
“We're a long way from having normal credit markets in America,'' former U.S. Treasury Secretary John Snow, now chairman of Cerberus Capital Management LP, said on the program.
“If I had to single out one big risk, it's that we stay stuck in this credit crunch,'' Snow said. “If it goes on much longer, I think we will clearly face a much longer and sharper falloff in economic output.''
Still, the economy will probably avoid a contraction because of sustained exports and the “responsiveness'' of the Fed, Snow said.
“The pundits who said we are going to have a deep and long recession are likely going to be wrong,'' he said.
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