Central bankers disagree on rates
Last week, Fed officials expressed very different opinions, with some, including Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn, expressing deep worries about the economy. Others, such as the heads of the Philadelphia and Chicago Fed banks, fret that lower interest rates could spark inflation.
While it appears U.S. central bankers are poised to cut interest rates when they gather Dec. 11, the varying opinions suggest a hefty rate cut is unlikely, according to some economists, including those at Action Economics.
It also suggests multiple members could dissent, something that rarely happens on the consensus-seeking Fed, says Brian Wesbury, chief economist at First Trust Advisors.
"There's a lot of dissension today, more than usual," Wesbury says, noting Fed watchers should focus more on what Bernanke and Kohn say because they hold more sway. "It's very clear there are heartfelt opinions going in different ways."
Investors in a futures market in which participants bet on upcoming Fed moves were fully expecting a quarter-percentage-point cut this month and were placing the odds of a half-point cut at 70 percent, according to Action Economics.
The Fed's target for short-term interest rates, which influence borrowing costs economywide, is 4.5 percent, the lowest since March 2006.
Last week, Bernanke, Kohn and St. Louis Fed Bank President William Poole strengthened expectations of a rate cut as they expressed concerns that renewed financial market turmoil raised economic risks. Bernanke noted consumers face numerous "headwinds."
After rising for six months, consumer spending in October was unchanged after adjusting for inflation, the Commerce Department said Friday. Income growth eased.
But some on the Fed, including the bank presidents from Chicago, Philadelphia and Dallas, last week focused their concerns on inflation, which would require steady or higher interest rates.
While Bernanke came into the Fed pledging more open conversation, such conflicting Fed-speak can be harmful, says Joel Naroff, head of Naroff Economic Advisors.
"Democracy is a very, very messy thing," Naroff says. "The Fed can't be there with all of these people with different philosophies creating chaos in the markets."
But Mickey Levy, chief economist at Bank of America, says it's healthy that Fed officials show they differ.
"You don't want all policymakers to all be coming out of the same thought process," he says. "That's what makes the Fed successful."
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