Is the Fed cutting rates too slowly?

John W. Schoen Senior producer • Profile • E-mail

Federal Reserve Chairman Ben Bernanke added his voice Thursday to a growing chorus of those who support proposals to boost the stumbling economy through federal tax cuts or spending increases. But at the same time he is coming under criticism from some analysts who think the Fed has moved too slowly on interest rates to head off the downturn.

Bernanke appeared before the House Budget Committee and backed the general idea of a stimulus plan, which also won support from the White House Thursday. With a majority of likely voters now saying the economy is the No. 1 issue facing the country in this presidential election year, efforts have intensified to get a bill onto President Bush's desk.

With pressure for a government stimulus package mounting on Capitol Hill and on the campaign trail, the White House said Thursday that Bush would lay out the principles behind his idea of a new economic stimulus package on Friday. Bush told congressional leaders privately on Thursday he favors personal income tax rebates and tax breaks for businesses to help avert a recession, officials said.

But it’s widely acknowledged that the Fed itself needs to do the heavy lifting by continuing to lower interest rates, which it began doing in September.

“The Fed just should act a lot faster than they have been acting,” said former Fed Gov.  Robert Heller. “Just to do that old Greenpsan one-quarter baby step at a time, in the current situation, doesn’t do the trick. The Fed has been behind the curve for three-quarters of a year now.”

Every Fed has a mix of hawks and doves — those who favor keeping rates a bit on the high side vs. those who want them as low as possible. But Bernanke’s critics say that, in addition to moving too slowly, the Fed has given mixed signals about its rate policy from one meeting to the next.

After holding rates steady beginning in June 2006, the Fed came under pressure to cut rates last year after it became clear that the housing bubble had burst. Yet the central bank held rates steady at its August meeting even as investor fears about bad loans all but shut down credit markets. The Fed made up for lost ground with a half-point cut in September, then added quarter-point cuts in October and December.

Today forecasters are widely expecting a half-point cut in benchmark rates when Fed policymakers meet Jan. 30, and Bernanke recently has been outspoken about the Fed’s intention to cut rates further.

Some of the criticism of the Bernanke Fed has focused on the style and actions of the chairman himself, who has been in office two years. No one doubts Bernanke’s qualifications for his current role; as a distinguished academic economist, he is one of the foremost experts on the causes of the Great Depression and the Fed’s role in managing economic downturns. But some say his management style may be a little too collegial for the current crisis.

As a Princeton University department chair, Bernanke developed a knack for building consensus – not always an easy task with the 12 independent-minded members of the Fed’s rate-setting Open Market Committee. Though his predecessor Alan Greenspan opened meetings with his own recommendations and then took comments from around the table, Bernanke is said to hear out the rest of the committee before weighing in with his own views. That consensus strengthens the Fed’s decisions, but critics say it may also slow the central bank’s response to crisis.

“They call him Gentle Ben,” said Heller. “But he clearly has to build a consensus in the committee.  If votes turned out to be 7 to 5 you would hear people saying, ‘Oh my God. He doesn’t get the other people on board.’”

Former Fed officials also note that members of the rate-setting committee generally work from the same economic data and analysis provided by the central bank’s research department.

Much of the criticism of the Fed has been coming from Wall Street, where easy-money policies could help take some of the sting out of the roughly $100 billion in losses from bad lending decisions during the housing bubble. But Bernanke has said he is not overly concerned with those views.

“It’s not the Federal Reserve’s job to protect investors from the decisions they made,” Bernanke told the budget committee Thursday.

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