The Fed, Part III: Poole Says `Real Economy' Unhurt by Subprime Collapse.--

Federal Reserve heavyweight Bill Poole gave an interview to Bloomberg:

William Poole, president of the Federal Reserve Bank of St. Louis, said there's no sign that the subprime-mortgage rout is harming the broader U.S. economy, and an interest-rate cut isn't yet needed.

"I don't see any impact as yet on the real economy or on the inflation rate," he said in an interview in the bank's boardroom. "Obviously, there could be an impact, but we have to rely on some real evidence."

Barring a "calamity," there is no need to consider an emergency rate cut, Poole said. His comments were the first by a Fed official since the U.S. central bank joined counterparts in Europe and Asia to inject emergency funds after a surge in money- market rates. The Fed has added $71 billion of reserves in the past five trading days. Poole, 70, said businesses have maintained their hiring and investment plans and banks have sufficient capital to weather the credit-market turmoil. The St. Louis Fed chief stressed that the best course is for policy makers to assess the latest economic data when they next meet Sept. 18. The comments contrast with the certainty that traders put on a rate cut next month.

"If the data confirm the market's view that the economy is sagging, we'll have to decide whether to share that view," said Poole, who votes on the rate-setting Federal Open Market Committee this year. He cited the monthly jobs, retail sales and industrial production reports as key gauges he'll be watching.

The yield on the September federal funds futures contract closed at 4.95 percent today, indicating at least a quarter-point reduction in the Fed's target. The benchmark two-year Treasury note yielded 4.29 percent, the furthest below the Fed's benchmark since 2001, when policy makers were lowering rates.

"There's no way the Fed is going to reduce interest rates before the meeting," said former Fed Governor Lyle Gramley, now senior economic adviser at Stanford Group Co. in Washington. "Bill is just being realistic that we haven't seen anything going on in markets yet that would warrant that kind of action."

Poole acknowledged that the credit-market turmoil will "stretch out" the "adjustment" in the housing industry. He said he couldn't predict how long the downturn will last.

The upheaval in credit markets was caused by deepening losses on securities backed by U.S. subprime mortgages. BNP Paribas SA, France's biggest bank, shocked investors Aug. 9 when it halted withdrawals from three funds just a week after its chief executive officer said the lender wasn't at risk. . . .

Poole rebutted comments from some Fed watchers that the central bank may be out of touch with market developments. The criticism followed comments the St. Louis Fed chief made to reporters on July 31 that the slump in stocks was "a typical market upset."

"No one has called up and said the sky is falling," Poole said today. "As I talk to companies, their capital spending plans are intact." . . .

[Referring to the housing market problems, Poole said:] "From experience, these things don't go on forever."

Poole said he didn't regret that the Aug. 7 statement retained a bias against inflation. He also said that while consumer price gains are "moving in the right direction," the "job is not done."

Inflation has slowed for four straight months under the Fed's preferred gauge, which excludes food and energy costs. . . .

Poole, who plans to retire next year, is a former economics professor at Brown University . . . .

Sometimes, as with the bursting of the bubble in 2000-2002, there may be little that the Fed can do to prevent the reduction by half of many people's pensions. Other times, by looking realistically at the relative threat of serious inflation v. recession and setting interest rates where they should be to continue moderate growth by limiting the spread of a credit crunch, the Fed might be able to prevent a US recession or soften its length or depth.

As a non-economist, I recognize that I lack not only the Fed's knowledge of the details of the US economy, but the expertise to evaluate that information with any confidence. I just hope that the Fed knows what it's doing.

Next: The Fed, Part IV: Bernanke on Deflation.