Fed Divisions Complicate Inflation Talks
WASHINGTON — Ben Bernanke's juggling act has gotten harder.
The Federal Reserve chairman has been taking extraordinary steps to prevent credit, financial and housing problems from driving the country into a deep recession. At the same time, he faces the danger that the very tonic to brace the sickly economy could bring about another dangerous ailment_ inflation.
And, rare divisions have surfaced among Bernanke and his central bank colleagues about just how aggressive the Fed should be in lowering interest rates to treat the wobbly economy.
Two of the Fed's members _ Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas _ on Tuesday opposed cutting a key interest rate by a hefty three-quarters point. Instead, they favored a smaller reduction. It was a crack in the mostly unified front the Fed often shows the public. The last time there was a double dissent was in fall 2002 under chairman Alan Greenspan.
The reasons for the Plosser's and Fisher's dissenting votes weren't laid out in the statement explaining the Fed's action, although both men have a reputation for being especially vigilant about fighting inflation.
"Containing inflation is the purpose of the ship I crew for, and if a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient," Fisher said in a speech earlier this month.
In fact, the Fed as a whole expressed concern on Tuesday about higher inflation _ something it didn't mention in the statement issued after its previous meeting, which concluded on Jan. 30.
"Inflation has been elevated, and some indicators of inflation expectations have risen," the Fed said Tuesday. Although policymakers were hopeful that prices would moderate in the coming quarters, they acknowledged that "uncertainty about the inflation outlook has increased."
Rising inflation, fueled in large measure by skyrocketing energy prices, complicates Bernanke's job of trying to get the economy back on firm footing.
The Fed started cutting rates last September and turned much more forceful this year. Those lower rates can aggravate inflation at a time when people and businesses already are smarting from high energy and food prices. The Fed's rate cuts also have weakened the dollar. That has raised the cost of imported goods coming into the U.S. and could lead American companies to raise their prices as foreign-made goods become more expensive.
If treating inflation were the priority, the Fed would take the opposite action and raise rates.
Fears have grown that the country could be headed for "stagflation," a toxic mix of stagnant economic activity and rising inflation not seen in three decades. "I don't anticipate stagflation," Bernanke told Congress last month. "I don't think we're anywhere near the situation that prevailed in the 1970s."
Oil prices, which have galloped to record highs in recent weeks, are now hovering around $100 a barrel. Gasoline prices have marched upward and are expected to hit $4 a gallon nationwide this spring.
"I think the threat of inflation is as high as it's been since the 1970s. Bernanke and the rest of them have a challenging task to navigate the economy away from recession and at the same time avoid inflation taking root," said Sean Snaith, economics professor at the University of Central Florida. "If Bernanke can do this, he'll look like a hero."
Snaith and other economists said that Tuesday's double dissents and the Fed's talk about inflation concerns could make it more difficult for Bernanke to build consensus around the Fed's next move on interest rates. "One more dissent would be an open revolt," said Ken Mayland, economist at ClearView Economics.
The Fed's next scheduled meeting on interest rates is April 29-30. Some believe the Fed might be more inclined to order a smaller rate cut at that time, depending on economic and financial conditions.
"Bernanke will have a tougher juggling act to do in the future," Mayland said. "It is a fine line that they are walking here between two troubles."
When asked about that by lawmakers recently, Bernanke responded: "We're simply going to have to keep weighing the different risks and trying to find an appropriate balance for policy going forward."
In slashing interest rates, the Fed has been squarely focused on rescuing the economy. At the same time, Bernanke has repeatedly said the Fed must be on guard for any inflation danger signs.
Why? Because once inflation gets a grip on the economy, it can be hard to break. A rapid rise in price erodes the purchasing power of people. It squeezes companies' profits, too, and can make them more reluctant to hire and expand. It eats into returns on investments. As people and companies hunker down, that further restrains overall economic growth.
Former Fed Chairman Paul Volcker ratcheted rates up to the highest levels since the Civil War to break inflation's hold. That jolt, however, plunged the country into the painful 1981-82 recession.
"There is increasing concern among some on the (Fed) that freewheeling rate cuts are creating a significant problem with the Fed's goal of anchoring inflation expectations," said Scott Anderson, senior economist at Wells Fargo Economics. If people, companies and investors believe inflation will pick up, they will act in ways that can make inflation worse.
"It is important that inflation expectations remain stable. If those expectations become unhinged, they could rapidly fuel inflation," Plosser said in February. "Moreover, as we learned from the experience of the 1970s, once the public loses confidence in the Fed's commitment to price stability, it is very costly to the economy for the Fed to regain that confidence."
Loading comments…
JEANNINE AVERSA | March 20, 2008 05:40 PM EST |
Compare other versions »Compare and versions