Wednesday, January 9, 2008

Even The Fed Is Not Unanimous


On January 8 the Fed released ( a summary of recent deliberations by the regional Federal Reserve Banks on whether or not they should lower the discount rate at which the Fed lends to banks. (Don’t confuse this rate with the Federal Funds rate, which is the rate at which banks lend to one another.)

Eight of the twelve regional Federal Reserve Banks concluded:

“Federal Reserve Bank directors in favor of reducing the primary credit
rate by 25 basis points generally agreed that the downside risks to economic growth had increased and that conditions in financial markets had recently deteriorated. Some directors thought that a reduction in the primary credit rate might improve liquidity in the interbank term funding market. In light of the financial market situation and other factors affecting economic prospects, these directors concluded that reducing the primary credit rate to 4-3/4 percent would be sufficient at this time. “

Two of the banks wished to cut even further:

“Federal Reserve Bank directors in favor of a 50-basis-point reduction expressed similar concerns. They believed, however, that financial market conditions and the economic outlook necessitated a larger reduction in order to provide some insurance against a more serious economic downturn. Accordingly, they supported a primary credit rate of 4-1/2 percent.”

And two banks believed no cut was necessary:

“Federal Reserve Bank directors who preferred to maintain the current primary
credit rate of 5 percent considered the incoming evidence of a slowdown in economic growth to be within their expectations and viewed the re-pricing of credit to be a necessary adjustment. In the absence of new material information, they considered concerns about a slowdown in economic activity to be offset by continued inflation pressures and judged that an unchanged primary credit rate was appropriate.”

You’re in good company if you’re undecided whether or not recession or inflation is the greater threat, although the large majority of the Federal Reserve banks voted to reduce the discount rate.

Meanwhile, on the same day the Fed also reported ( that consumer credit grew by $15.5 billion at a seasonally-adjusted annual rate. Multiplying by 12, that’s the annual equivalent of $186 billion. If you place that figure on the chart below, you can see no sign of weakness in the December data. Consumers borrowed heavily to support their purchases. Was that noise in the data? A fluke? Or is the economy really stronger than many observers realize?

Stay tuned.

Consumer Credit

(Click on chart to enlarge)

Recessions shaded

(The chart is taken from [Click on Seminars and then Charts.] Go there for additional charts on the economy and a list of Economic Indicators.)

© 2008 Michael B. Lehmann

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