so apparently the fed is concerned about stock and real estate prices ... or at least some of them.
Fed Sought to Keep Flexibility
With Shift in Rate Statement
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
March 18, 2004 7:20 p.m.
WASHINGTON -- Critics of the Federal Reserve warn that its low interest rates are boosting prices for stocks, bonds and houses to unsustainable levels. Some Fed officials, it turns out, may share those concerns, minutes of the Fed's January meeting show.
The minutes also show that central-bank officials are divided both on the wisdom of saying they can be "patient" about raising interest rates and on whether inflation is more likely to rise or fall this year.
The disagreement suggests the Fed, while currently unified in its desire to see the economic expansion strengthen before the central bank raises rates, could experience more dissent as the year progresses.
The Fed's "considerable period" commitment held down long-term interest rates last year and early this year while the economic expansion gained traction. But some FOMC members worried that the commitment had "contributed to valuations in financial markets that left little room for downside risks," the minutes say, indicating worries that an eventual rate rise could trigger a violent reaction in the markets. Some private analysts long have argued the Fed's easy monetary policy is encouraging excessive speculation in stocks, corporate bonds and houses.
A minority of the Fed policy makers remained uneasy at the January meeting with even the less-restrictive commitment to patience in raising rates. They worried it could "shape expectations" in ways that "could complicate the conduct of policy," and is no longer needed since the economy is growing strongly, the minutes say.
Officials also were divided on the direction of inflation. Some pointed to low interest rates, tax refunds, strong commodity prices and scattered signs of businesses raising prices as evidence of risks of higher inflation. But others, and the Fed's professional staff, thought rapid growth in output per worker, which holds down production costs, high unemployment and unused business capacity probably would nudge inflation down a bit. The latter view currently prevails. On Tuesday, the Fed said it still saw a slight risk of inflation falling too far.
The divergence of views appears unlikely to tip the Fed toward raising interest rates soon. Despite confidence that a "vigorous expansion was now firmly established," officials preferred to "take risks on the side of assuring rapid elimination of economic slack." With recent disappointing job growth, the Fed is still more likely to err on the side of keeping rates too low for too long.
However, should employment pick up in coming months, Chairman Alan Greenspan may face problems steering a monetary course that satisfies all his colleagues. That was reflected in his testimony to Congress last month, in which he warned both of "risks that could threaten the sustainability of the expansion" and the risks that interest rates could be "improperly calibrated" for a strengthening economy.
At their January meeting, Fed officials also discussed at length their communications strategy, prompted in part by controversy over "considerable period." Officials debated whether to ditch their assessment of the "balance of risks" in the statement that follows each meeting, or to strip the statement down to boilerplate choices, but rejected both options. Instead, they decided to adjust their statement and the balance of risks "gradually over time in keeping with evolving economic conditions."
Officials also considered whether to release minutes just a few weeks after each meeting rather than waiting until after the subsequent meeting. But some feared early release would "feed back adversely" on their deliberations and the quality of the minutes themselves. Early release may be revisited at some point; the Fed's staff is still studying the issue.
AI
