Federal Reserve & Interest Rates

Governor Kevin Warsh, member of the Federal Reserve Board since February of 2006, delivered a speech on Financial Market developments on Friday to the State University of New York at Albany’s School of Business.

He opened with warm greetings, as he was born and raised in Albany, New York. He briefly reflected on his growth in his recent position as Special Assistant to the President for Economic Policy and as Executive Secretary of the National Economic Council (since 2002).

After briefly addressing the general responsibilities of the Federal Reserve as a whole, he proceeded with his discussion on current issues. He made the introductory point, “While the subprime-mortgage markets showed some of the earliest and most pronounced indications of weakness, I believe that problems afflicting the subprime-mortgage markets served more as the trigger than the fundamental cause of recent market turmoil and economic uncertainty.”

Governor Warsh went on the explain the responsibilities of the Federal Reserve, monetary policy, and the current market conditions. He says that the subprime lending was the spark but not the cause of the recent economic instability.

He ascribes the cause to a combination of things. One main argument that he presented was the high performance of the market in June. He stated that investors become overconfident in the high performance, and consequently made decisions that were not as secure as they seemed on the surface. He explained, “High levels of confidence, perhaps even complacency, were also observable in the behavior of many financial intermediaries.”

Governor Warsh did make it clear that there was an investment pullback of investors in “a broad range of structured products, even though unrelated to mortgages.”

The increase of mortgage delinquency rates also contributed, as we know, and Warsh says, “…it may be that investors fundamentally lost confidence in their ability to value a broad range of assets, particularly those that rely on robust securitization and secondary markets. Moreover, uncertainty about the ability of large financial institutions to fund their commitments eroded confidence in counterparties more generally.”

Warsh did not claim that the Federal Reserve has all the answers regarding the path of our economy. “How quickly markets normalize may depend on the speed with which investors and counterparties gain comfort in their abilities to value assets.”

He concluded with the intent of the Federal Reserve to make moves that are with the interest of creating long term economic growth, and their continued efforts to access each new development as economic uncertainty still looms.

Governor Kevin Warsh offered an expanded view on the contributing factors of economic conditions. He is a proud member of the Federal Reserve and plans to serve his full term, until 2018.

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