Bernanke juggles economy and Fed itself
WASHINGTON (AP) - March 20, 2008 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."