By Steven K. Beckner

(MNI) – Joining the chorus of concern at the Fed about housing was
then New York Fed President Tim Geithner, transcripts of the
2006 Federal Open Market Committee meetings show.

The current Treasury Secretary feared “we may already be in the
midst of what will prove to be a more acute adjustment in housing and a
much more dramatic response by households to the change in expectations
about future income and wealth and that the saving rate has been
unsustainably low and will have to rise more significantly,” according
to the transcripts, released Thursday.

Richmond Fed President Jeffrey Lacker, who is voting on the FOMC
this year, took an opposing view and sided with Bernanke. He maintained
that real short-term interest rates (subtracting inflation from the
nominal funds rate) were “still somewhat low by historical standards.”
And so he saw little risk of an undue slowdown.

And “although the outlook for real growth is noticeably softer than
it was at the last meeting, it doesn’t seem to me clearly inconsistent
with growth around trend going forward,” he said. “I see the risk of
slowing the economy overly much in the near term by increasing real
rates as relatively low.”

Bernanke, who had changed the way FOMC meetings were conducted to
encourage more interplay among members, still had the last word — and
that was that a 17th consecutive 25 bps hike in the funds rate was
“justified by the basic economic situation.”

“The greater risk seems to be from inflation,” said the recently
minted Fed chief.

“It is a good thing that housing is cooling,” Bernanke said. “If
we could wave a magic wand and reinstate 2005, we wouldn’t want to do
that because the market has to come back to equilibrium. The level of
activity now is about a third bigger than it was in during the boom in
the late 1990s.”

“The housing construction industry is large, bigger than
historically normal, and a controlled decline in housing obviously is
helpful to us at this stage in bringing us to a soft landing in the
economy,” he added.

Still, Bernanke said the FOMC was “getting very close to where we
need to be” on the funds rate, though “we don’t know for sure yet.”

Bernanke also acknowledged the concerns of Yellen and others,
saying, “I recognize that there are also some downside risks, some
potential nonlinearities in housing markets and financial markets.”

Going along with calls for a more symmetrical policy statement,
Bernanke said the FOMC “should move but try to keep our options open and
to move slowly if we do move further.”

“It’s a delicate balancing act to show that we are aware of the
inflation situation but that we are not single-mindedly focused on the
inflation situation,” he said.

What emerged was a new forward guidance: “Although the moderation
in the growth of aggregate demand should help to limit inflation
pressures over time, the Committee judges that some inflation risks
remain. The extent and timing of any additional firming that may be
needed to address these risks will depend on the evolution of the
outlook for both inflation and economic growth, as implied by incoming
information.”

As it turned out the FOMC’s June 2006 move to 5.25% would prove to
be the last. The funds rate would stay at that level until Sept. 18,
2007, when a crisis that would surpass even the worst Fed imaginings
forced a 50 bps cut — the first of many that would take the funds rate
near zero in December 2008.

** Market News International Washington Bureau: 202-371-2121 **

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