Magazine article American Banker

Fed, Treasury Again Exchange Blame for Rising Interest Rates at Hearing

Magazine article American Banker

Fed, Treasury Again Exchange Blame for Rising Interest Rates at Hearing

Article excerpt

WASHINGTON -- Uncertainty over the course of monetary policy and federal budget deficits has driven interest rates two to four percentage points higher than they actually ought to be, administration and Federal Reserve Board witnesses charged during a hearing Friday.

In yet another round of finger-pointing testimony -- this time before the House Banking subcommittee on domestic monetary policy -- a Treasury official blamed the Fed for keeping interest rates high, and Fed officials continued to lay the blame on the budget deficits kept in place by the administration and Congress.

This time, however, the jousters employed some extra ammunition in their battle. The witnesses testified that market uncertainty is an added factor.

Manuel H. Johnson, assistant Treasury secretary for economic policy, said the uncertainty over how the Fed will conduct monetary policy has boosted interest rates by 200 to 400 basis points, or 2% to 4%. Fed Governor Lyle E. Gramley, however, said that while precise estimates cannot be made, the effects of increasing federal deficits seem to have pushed interest rates about two percentage points higher. Mrs. Horn Speaks Up

The hearing, designed to find out how increasing interests rates are affecting the economy, also featured testimony from Cleveland Fed President Karen N. Horn. Mrs. Horn supported the Fed's position that high deficits are the main reason why interest rates are getting higher.

"People are, in effect, saying that what we have feared is here -- the combined private and public credit demands cannot be satisfied within the constraints of a noninflationary monetary policy," Mrs. Horn said. "Interest rates are therefore rising, and unless the basic underlying causes are dealt with in the future, further increases cannot be ruled out.

"This realization," she continued, "may have a far more sobering effect upon the strength and the character of the current expansion in the Fourth District than will the immediate consequences of the recent increases in rates."

The Fourth Fed District includes much of the industrial Midwest, including all of Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia. The area, Mrs. Horn said, is the heartland of much of the nation's heavy industry which will require massive infusions of borrowed money to remodel plants and make these industries, such as steel, more competitive with cheaper, foreign-made goods.

Mrs. Horn hit the long-term impact of the federal budget deficits crowding out other borrowers in the marketplace. …

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