Dissent and Deflationistas in Fed Ranks
Can you see how this is only going to get messier going forward? They can't even agree on what color explosion-proof marble to adorn their temple with, how on Earth are they going to decide to raise rates when the time is right?
Especially considering the fact that the right time came and went long ago.
Atlanta Federal Reserve President Dennis Lockhart Wednesday warned the recovery remains so weak that deflation--or a dangerous generalized drop in price levels--is a risk that warrants watching. While there is no planning under way about exactly how to proceed, Lockhart said a deflation discussion will likely be on the next Fed agenda.
"It's appropriate to think about what we would do under a deflationary scenario," Lockhart said, adding that recent developments have made him even more convinced about the need to leave short-term interest rates at a record low near zero.
There are growing concerns that growth may slow in the second half as sluggish consumer spending struggles to make up for the fading government stimulus and inventory boost. U.S. consumer confidence fell sharply in June as Americans worried about their job prospects. The jobs report due Friday is expected to show that nonfarm payrolls fell in June as temporary Census workers were laid off, while unemployment may have edged up from the 9.7% rate seen in May.
Lockhart's comments appeared to contrast with those made by Richmond Fed President Jeffrey Lacker on Monday, who indicated the central bank could soon point to the need for increasing rates as the economy gains speed. Continued strength in consumer and business spending in the U.S. may "soon" allow the Fed to drop its expectation that rates will remain close to zero for an "extended period," Lacker said Monday.
In another speech Wednesday, however, Fed board governor Elizabeth Duke said a further drag on growth may come from tight lending conditions. She warned that a full restoration of credit growth is likely to be years away.
Duke rejected the notion that credit levels are continuing to decline because banks refuse to give credit, noting that banks must lend to receive profits.
"A bank that does not want to lend is like an airline that prefers to keep all its planes on the ground," Duke said. Policy makers must look deeper to find the real causes of tight lending, but the results will take time to sort through, she added.
The deflationistas are back and unfortunately, they've got a majority at the moment.