As reports on the health of the U.S. economy showed mixed results Thursday, the plot thickened in the drama over Federal Reserve Chairman Ben Bernanke’s big decision.
Before he and his colleagues decide whether to cut interest rates Sept. 18 amid a continuing credit crunch in the mortgage market, they would like to see at least some confirmation that the economy is weakening and in danger of a recession.
But stronger-than-expected retail sales by big chain stores and a continued expansion in an index measuring the services side of the economy presented just the opposite picture. Another report showed a rebound in worker productivity in the second quarter.
On the negative side, the Mortgage Bankers Association reported that the number of homeowners receiving foreclosure notices hit a record in the second quarter, as 0.65 percent of mortgage holders started the foreclosure process.
While Wall Street is pressuring Bernanke to reduce interest rates, and fully expects him to do so, the bad news does not appear severe enough for the Fed’s liking. The government will release the employment report for August on Friday, but analysts said they do not expect it will be conclusive because most of the information was gathered before the mortgage crisis hit markets so forcefully late in the month.
So Bernanke and other Fed members might have to act without the data they normally like to have before making a decision that clearly will be the most important of his year-and-a-half tenure as head of the central bank.
Some analysts believe he should stand pat if there is not evidence of an economic weakening, but others believe keeping interest rates the same could be extremely dangerous.
“If they don’t lower the federal funds rate, it will be one of the largest mistakes in Federal Reserve history,” said Lyle Gramley, a former Fed member who has served as an economist for the mortgage banking industry.
The federal funds rate is the interest rate that banks charge each other for loans. The Fed sets this rate, now at 5.25 percent, which is the basis for all other short-term interest rates.
Gramley said Bernanke did not move quickly enough when the mortgage problem seized up financial markets early in August, and to buck the markets again only would confirm an impression by some analysts that he was “asleep at the switch, and maybe too green and maybe too new.”
Inaction could lead to a bidding up of interest rates across the board and possibly lead to a recession, Gramley said.
Nigel Gault, an economist at Global Insight, a Boston consulting firm, and David Resler, chief economist at Nomura Securities International, agreed that Bernanke and company should reduce interest rates Sept. 18 even if the evidence isn’t as clear as they might like.
“The Federal Reserve is not going to be able to stop the housing market from going down,” Gault said. “What it can do is limit the fallout and help to offset the mortgage resets.”
Over the next two years, about 2 million Americans will see their adjustable-rate mortgages reset at higher interest rates. So-called subprime lenders made many of these loans to marginally qualified buyers.
Bernanke has said he would act “as needed” to prevent economic damage from the mortgage crisis, a statement that kept financial analysts guessing. Many Wall Street economists have criticized him, saying he was “behind the curve” when the mortgage problem mushroomed.
His predecessor, Alan Greenspan, was known for intervening quickly when it appeared financial markets would be harmed. Bernanke, however, has emphasized that he does not want to bail out investors who unwisely put their money in shaky mortgages.
John Veitch, an economics professor at the University of San Francisco, and Brian Wesbury, chief economist for First Trust Advisors in Lisle, said they believe Bernanke should resist Wall Street pressures and keep interest rates steady.
Veitch partly blamed the housing bubble on easy money during Greenspan’s reign. He said Bernanke should let Wall Street work out its problems, cutting interest rates only when the economy is in clear trouble.
Wesbury’s firm said Thursday’s economic reports are “not consistent with the whining we have been hearing from Wall Street that the Fed needs to cut the federal funds rate.”
The report on chain-store sales showed that consumers shopped briskly in August after a July slowdown. Wal-Mart Stores Inc., Target Corp., Pacific Sunwear of California Inc. and Saks Inc. were among firms reporting solid sales.
However, Resler said, the report is far from a comprehensive picture of retail sales for August. A government report, due out Sept. 14, is likely to show more modest sales, he said.
The U.S. service economy expanded by the same number in August as in July, the Institute for Supply Management said. The reading of 55.8 was better than expected. A figure above 50 indicates expansion.
The Labor Department said worker productivity in the second quarter grew at 2.6 percent, the fastest rate in nearly two years. Wage pressures eased, according to the report.
The mortgage bankers report said the highest foreclosure rate was in Ohio, at 3.6 percent. The highest delinquency rate, or payments that are late, was in Mississippi, at 9.33 percent.
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wneikirk@tribune.com
