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Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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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.

-- and many similar comments appearing in the speeches of FOMC participants over the past several weeks (as I documented here, here, and here).

UPDATE: Brad DeLong notices this article as well, as does Brad Setser.  (And though I'm often on the other side, shameless plugs from Angry Bear are always welcome here.)

January 24, 2005 in Federal Reserve and Monetary Policy , Trade Deficit | Permalink


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Bravo to the FED for arguing for fiscal responsibility. But let's see - how do we rein in the $600 billion plus General Fund deficit? Tax increases? Not on Bush's watch. Cuts in Federal spending? Given that even the fiscal hawks in the GOP have few proposals that would amount to much - not likely. Ah, Steve Forbes knows (per his CNN interview). Raid the Social Security lockbox aka the pot of honey (shameless call to go read Angrybear for more).

Posted by: pgl | January 24, 2005 at 06:42 PM

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