Fed officials discuss economy at KSU

gkocher1@herald-leader.comNovember 27, 2012 

FRANKFORT — Today's low interest rates benefiting consumers and home buyers are forecasted to continue into mid-2015, a Federal Reserve Bank of Cleveland official told business leaders in Frankfort on Tuesday.

"So if there was ever a time to do some long-term investing, it seems like it would be now," said LaVaughn Henry, a vice president and senior regional officer who works in the Fed's Cincinnati branch. He declined to give predictions on specific rates.

Henry made the comments during a luncheon meeting with 89 bankers, teachers, students and others at Kentucky State University, where Henry is also a member of the board of regents.

The economy has made progress over the last four years, but the Fed's monetary policy "can't solve everything," Henry said. "Most notably, the federal budget has to be put on a sustainable path. ... Also we do need reform in the tax code, and we have to have substantial reform, not just tweaking around the edges."

As the manager of monetary policy, the Fed does not govern fiscal policy regarding taxing and spending, which is the role of Congress. So discussions about the "fiscal cliff" — the spending cuts and tax increases that will kick in automatically if the President and Congress fail to reach a budget deal by year's end — are not part of the Fed's responsibilities.

However, citing figures from the Congressional Budget Office, Henry said the "implications of going over the cliff versus just kicking the can down the road are very different for the long term."

The CBO has said that allowing the tax hikes and spending cuts of the fiscal cliff to come to pass will dramatically shrink the nation's deficit in coming years.

In 2013, for example, the deficit would be $641 billion (or 4 percent of growth domestic product) if the country goes over the cliff versus an estimated deficit of $1 trillion (6.5 percent of GDP) if current taxing and spending policies are extended.

Allowing fiscal cliff-like policy to continue for the next decade would lower U.S. deficits to just 0.9 percent of GDP in 2022, the CBO has said.

But after his address, Henry clarified that he is not saying the country should go over the fiscal cliff, which observers say could raise unemployment to 9 percent and possibly send the country back into a recession.

"I'm not saying go over the fiscal cliff, but something has to be done now to get our long-term house in order," Henry said.

A combination of tax-code reform and entitlement reform would probably be the best path, he said.

The KSU audience also heard from Julie Stackhouse, a senior vice president of the Federal Reserve Bank of St. Louis. She noted more than 470 U.S. banks and thrifts have failed since 2007.

A recent study by the St. Louis Fed found that those banks that "thrived" during the financial crisis were more likely to be smaller, headquartered in rural areas, had lower ratios of loans to assets, were more concentrated in consumer and agricultural loans, and were less concentrated in commercial real estate.

A backlog of delinquent mortgages and concentrations of "underwater" mortgages — in which a homeowner owes more debt on a property than what it is worth — remain to be resolved, she said.

Information presented by Stackhouse showed 9.5 percent of the mortgages in Kentucky were "underwater" in the second quarter of this year. That's not bad compared to 58.6 percent in Nevada, 42.7 percent in Florida, and 35.8 percent in Georgia.

KSU hopes to continue a series of public meetings with Fed officials, with the next happening as early as next spring.

Greg Kocher: (859) 231-3305. Twitter: @HLpublicsafety

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