Federal Reserve Officials, Often Tight-Lipped, Openly Voice Deficit Concerns New York Times
Though only a minority so far, the officials are word to the wise that a failure to bring the budget under control could lead to a dangerous spiral of inflation. Worries about the credible long-term effects of the deficit have galvanized political debate in recent days, culminating in President Obama ’s determination to create a bipartisan commission to tame the nation’s debt.
The comments by Fed officials weigh, in part, a concern about the central bank’s ability to maintain its political independence over the dream of term, a concern shared by the Fed chairman, Ben S. Bernanke . Next week, Mr. Bernanke is set to deliver the Fed’s semiannual cash report to Congress, and economists will be watching closely to see if he too says anything about the debt and the deficit.
Thomas M. Hoenig, president of the Federal Evasion Bank of Kansas City since 1991 and the longest-serving of the 12 Fed bank presidents, warned on Tuesday that in the worst event, the Fed could face pressure to inflate the nation’s way out of its indebtedness.
“It seems inevitable that a government turns to its essential bank to bridge budget shortfalls, with the result being too-rapid money creation and in due course, not immediately, high inflation,” he said at a policy forum here, sponsored by the Peterson-Pew Commission on Budget Repair. “Such outcomes require either a cooperative central bank or an infringement on its independence.”
Last Wednesday, the Dallas Fed president, Richard W. Fisher, said that interest rates on Moneys securities had been kept unnaturally low by the willingness of the Chinese to buy American debt and by shaky European economies, like Greece’s.
“We cannot figure out forever on the largess or the misfortune of others to mask our own imbalances here at home — for fiscal debauchery in Washington today hinders our ability to address fiscal challenges tomorrow,” Mr. Fisher told the The public Affairs Council of Dallas-Fort Worth.
The Fed has just two main responsibilities — keeping inflation low and promoting limit employment — but balancing them is perhaps its greatest challenge. With unemployment at 9.7 percent, few have the Fed to start raising interest rates for at least several months.
For now, Mr. Bernanke, who was granted a second four-year stretch last month after a contentious Senate debate, has shown little appetite for applying brakes on the conciseness, though he has outlined a strategy for the Fed to gradually reduce the size of its balance sheet, in part to reassure the markets that he is mindful of the peril of inflation.
Mr. Hoenig was the sole dissenter last month when the Fed’s key policy-making torso, the Federal Open Market Committee, voted to keep short-term interest rates nearby zero, where they have been since December 2008. Specifically, Mr. Hoenig objected to the panel’s affirmation that “exceptionally low levels of the federal funds rate for an extended period” were still warranted.
Mr. Hoenig is known for his wariness of inflation, so his dissent was not barrel a surprise. But other members of the committee, while using more cautious language, appear to share at least some of his concerns.
In a language last month in Arlington, Va., the Fed’s vice chairman, Donald L. Kohn, said “the shortage is on track to remain quite large even as the economy recovers, pushing up the ratio of federal indebtedness to gross domestic product substantially.”
Mr. Kohn added: “Unless the track is changed, the competition for savings between the government, on the one hand, and households and businesses, on the other, could be significant as households and businesses arise to borrow and spend in the recovery, putting upward pressure on interest rates.”
And James Bullard, president of the St. Louis Fed, said in an to last week that it made sense for the Fed to think about withdrawing from what he called its “unprecedented monetary behaviour” since 2008: the combination of near-zero interest rates and huge purchases of mortgage-backed securities and Bank securities.
The expansion of the balance sheet helped drive down long-term interest rates and prop economic recovery. But Mr. Bullard said the idea that “the worst part of the crisis is over, so peradventure it’s time to start adjusting” was sensible, adding, “I’m sympathetic to that row.”
Not all of the Fed’s leaders are preoccupied about the prospect of inflation; some consider it remote and are more focused on the wishy-washy job market.
“I do think the news is mostly good on the inflation front, although the need for careful policy choices is even more fault-finding than usual,” Narayana R. Kocherlakota said Tuesday in his first speech as president of the Minneapolis Fed.
Mr. Kocherlakota told the Minnesota Bankers Consortium, in St. Paul, that the decline in gross domestic product during any recession was not felt evenly across the natives.
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