Financial conditions in the U.S. may be tighter than many indicators suggest, former Federal Reserve Governor Frederic Mishkin and four other economists said in a paper.
The economists reviewed the performance of seven financial conditions indexes, including those produced by Bloomberg LP, Goldman Sachs Group Inc., Deutsche Bank AG and Citigroup Inc., and then constructed their own index.
While many indexes “show the current level of financial conditions to be back at or slightly better than normal levels, our index has deteriorated substantially over the past two quarters,” Mishkin and his co-authors write. “This setback suggests that financial conditions are somewhat less supportive of growth in real activity.”
Mishkin and his co-authors said that deterioration in their own index was concentrated in non-mortgage asset-backed securities issuance, commercial mortgage debt and repo loans.
“The continued woes of the shadow banking system could continue to weigh on the pace of the recovery, despite the recovery in more traditional measures of financial conditions,” the authors say.
Mishkin said in an interview today that the central bank needs to keep interest rates low because there is “a tremendous amount” of idle capacity in the economy.
“We’re not going to get through that slack in the near term,” Mishkin said in an interview on Bloomberg Radio. “Monetary policy needs to be accommodative.”
Fed Chairman Ben S. Bernanke this week said the world’s largest economy is in a “nascent” recovery that requires low interest rates to encourage demand.
Fed Funds Rate
Policy makers have kept the benchmark federal funds rate for overnight loans among banks close to zero since December 2008 and said at their meeting in January that borrowing costs will stay low for an “extended period.”
Mishkin, 59, served as a Fed governor from September 2006 to August 2008. He is currently a professor of economics at Columbia University in New York.
The Bloomberg Financial Conditions Index stands in positive territory at 0.183, up from negative 12.6 on Oct. 10, 2008, in the days following the collapse of Lehman Brothers Holdings Inc. Among the Bloomberg index’s components are yield differences between commercial paper and Treasury bills and stock prices.
Co-authors on the paper include Jan Hatzius, chief economist at Goldman Sachs Group Inc.; Peter Hooper, chief economist at Deutsche Bank Securities Inc.; Kermit Schoenholtz, managing director at Citigroup Global Markets Inc., and Princeton University professor Mark Watson.
The paper entitled, “Financial Conditions Indexes: A Fresh Look after the Financial Crisis,” was submitted to the annual U.S. Monetary Policy Forum sponsored by the University of Chicago Booth School of Business.
(By Craig Torres, Bloomberg, February 26, 2010)