Bernanke and the 12 regional Fed presidents
TEXT OF INTERVIEW
Bill Radke: The business world’s gaze will be on Federal Reserve Chair Ben Bernanke tomorrow when he gives his economic outlook at the annual Fed symposium in Jackson Hole, Wyo. Now, we don’t know what he’ll say, but he’s sure not the only one talking. He has 12 regional Federal Reserve Banks all venting different opinions about what he should do.
Here to talk about all that dissension — and add her own opinion — is senior economist at the Bank of Tokyo-Mitsubishi, Ellen Zentner. Welcome to Marketplace.
Ellen Zentner: Thank you.
Radke: Let’s start with the dissension. I have heard more about regional Federal Reserve presidents this summer than I’ve heard in my entire life. The head of the Kansas City Fed says the biggest risk is inflation. The one in St. Louis says no, it’s deflation. What is all that division telling us?
Zentner: Well, it tells us that confusion reigns the day. And because of that, markets are pretty confused right now too. You always want the Fed to act with one voice. It always gives markets much more confidence in the direction that the Fed is taking. Not only did we come through an unprecedented, nearly unprecedented economic downturn, but the Fed has had to do some unprecedented things in order to try and get the economy moving again. And so, it’s only natural that when they’re sort of shooting in the dark here that there’s going to be some dissension within the Fed of how monetary policy should be conducted.
Radke: Most of my life it seemed like there was just Alan Greenspan, amen.
Zentner: Now, it’s Bernanke et al. Chairman Bernanke has come out and specifically said that one of the further measures they could do to get the economy moving was lowering that rate that they pay on excess reserves. That’s the rate that they pay banks in order to hold excess reserves at the Federal Reserve, that by lowering that rate, the idea would be that the banks would then start to lend money. St. Louis Fed President Bullard came out and said absolutely not, that’s a deadened policy and it won’t work. But at the same time, I have to agree with Bullard, because right now, there’s just disincentive for banks to lend when the banks can borrow from the Fed at a quarter percent interest and dump it into treasuries at 2.5 to 3 percent. They get a nice tidy gain, risk-free return. And essentially, it’s been tying up about $1 trillion in available credit. So in a sense, the Fed has been causing part of the problem by leaving rates so low.
Radke: You talked about the important of projecting confidence of speaking with one voice should Bernanke be shushing his regional presidents?
Zentner: Absolutely not. And he might play it as “it’s important to have these discussions where everyone gives their opinions so that everyone’s looking at the issues from each angle.” It’s unfortunate that there’s dissension, but it doesn’t necessarily have to mean that the Fed can’t come to some group decision.
Radke: What do you want to hear from Ben Bernanke tomorrow?
Zentner: Well, I’d like to hear him talk about just what are the concerns for the economic outlook. I like it that the Fed is being more realistic about the risk to the economic outlook, and I think Ben Bernanke is going to have to address that.
Radke: Ellen Zentner is senior economist at the Bank of Tokyo-Mitsubishi. Ellen, thank you.
Zentner: Thank you.
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