Fed Unlikely to Lower Interest Rates in Response to World Crisis
The Federal Reserve Board isn’t likely to reduce U.S. interest rates in response to the financial crisis that has swept Russia and many other nations this month, a number of Fed officials said here Friday.
However, the added uncertainty about where the world economy is headed and the likelihood the crisis will be a drag on U.S. growth has virtually eliminated pressure on the Fed to raise rates to keep U.S. inflation low, the officials said.
William Poole, president of the St. Louis Federal Reserve Bank, who dissented in favor of a rate increase at a Fed policy-making session in May, said he no longer is pushing for higher rates. None of the other officials, including Fed Chairman Alan Greenspan, who are here for the Kansas City Federal Reserve Bank’s annual economic conference, would speak on the record.
But several of the 14 policymakers here agreed that damage to the economies of nations such as Brazil, Mexico and Canada from sharply higher interest rates and falling stock prices means a weaker world economy and downward pressure on prices for many goods and services. Like the turmoil that began in Asian countries last year, the latest developments will be a serious drag on U.S. growth by lowering demand for U.S. exports, particularly in Latin America.
At the same time, slower growth around the world and falling prices for many products, especially basic commodities such as oil and copper, and the rising value of the dollar, will keep the cost of U.S. imports falling. That in turn will put downward pressure on inflation in this country, the Fed officials said.
A number of private economists at the conference were far more outspoken about the danger the financial crisis poses for the world economy and that of the United States.
“This has been the most disquieting and risky set of circumstances I have seen in my professional career,” said John Lipsky, chief economist at Chase Manhattan Bank.
And few of the private analysts think a Fed rate cut would be very useful at this point in stabilizing world financial markets.
“This is so big that a quarter-point [rate cut] doesn’t stop it,” said Allen Sinai, chief economist for Primark Decision Economics. “It’s like a currency intervention. You don’t do it if you’re not sure it will work.”
Most of those discussing the crisis said that investors’ large losses in Russia and that country’s unwillingness to adopt sustainable economic and budget policies and other financial reforms mean that the country won’t have access to world capital markets again for years.
Sinai and other economists said investors are pulling out of Russia and other developing or “emerging” market economies, such as those in Latin America, Asia and Eastern Europe, because they have reassessed the riskiness of investments there. In some cases, such as Mexico and Brazil, some of the selling that has driven interest rates up and stock prices down has been the result of those countries’ large, liquid financial markets. That is, buyers could be found for what the investors wanted to unload.
“This is a re-pricing of risk,” said Philipp M. Hildebrand of Moore Europe Research Services. One reason for that is the fear that other nations might follow Russia’s lead in halting payment on their debt. Another is that there may be no large international rescue package available when the next nation hits a financial wall because of the International Monetary Fund’s dwindling resources.
Robert H. Dugger of Tudor Investment Corp. argued that the Fed should lower rates immediately.
“That would do a lot of things that are very positive,” Dugger said. “The absence of a response deepens concerns. All the lessons of the past two decades of financial sector contractions indicate there will be” much slower growth or declines ahead.
But some of the Fed officials, while acknowledging the riskiness of the situation, said the eventual impact on the U.S. wasn’t clear.
