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January 24, 2005
Deficits May Be Wearing Thin At The Fed
That's the headline on an article by Edmund L. Andrews in yesterday's New York Times, which picks up on deficit wariness on the Federal Open Market Committee.
...something new is afoot, and it is not just that the Fed is raising rates back to more normal levels...
The new element is a rising concern at the Fed about the nation's imbalances: the federal deficit, which hit $413 billion in 2004; a low and declining savings rate; evidence of speculative behavior among investors and consumers; and the country's enormous trade and financial deficit with the rest of the world.
Most of this, of course, is coming right out of the minutes of the last FOMC meeting.
The Fed fired off another warning in the published minutes from its policy meeting on Dec. 14, saying, "a number of participants voiced concerns about domestic and global financial imbalances." Some members of the Federal Open Market Committee, which sets policy, were said to believe that the odds of "significant deficit reduction over the next few years were remote."
More surprising, the minutes said that some policy makers worried that the prolonged strategy of low rates might be fostering "excessive risk-taking" in financial markets and in the market for houses and condominiums. That sounded like a veiled references to concern about a "housing bubble," an idea that Mr. Greenspan has repeatedly shot down.
Mr. Greenspan is not, apparently alone. As reported by Reuters on Friday,
[Governor Susan] Bies and [Richmond Fed President Jeffrey] Lacker, like San Francisco Fed President Janet Yellen on Thursday, distanced themselves from comments in the December FOMC meeting minutes about possible excessive risk-taking in financial markets brought on by the long period of low interest rates.
The minutes said "some" policy-makers held those concerns, leading the markets to worry that the Fed as a group was leaning toward faster rate increases.
"I don't see any reason why one would expect more excessive risk-taking with lower real interest rates," Lacker said.
No such reservations seem to apply to the fiscal imbalance issue, as evidenced by these comments by Richmond's Lacker --
Instead, [Lacker] said the United States should deal with a "less than ideal" federal budget outlook.
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