Diamond News

Federal Reserve policy makers seem to be working at cross purposes.

In laying out plans to ease some constraints imposed on banks after the financial crisis, the Fed is moving to free up tens of billions of dollars for financial institutions to lend to promote faster economic growth.

At the same time it is reducing its balance sheet and gradually raising interest rates to restrain credit creation and keep the economy in check.

“The timing is not the most opportune” for relaxing the banking rules, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania.

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Those steps will complicate the Fed’s effort to engineer the soft landing of an economy that is already being juiced by tax cuts and government spending increases. To help bring that about, officials plan to keep raising interest rates over the next few years, though they’re expected to hold policy steady at their meeting next week.

“By itself this would risk putting regulatory policy on the same pro-cyclical trajectory as fiscal policy,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, though he added that the economic impetus from the former is dwarfed by that from the latter.

In unveiling a proposal[1] on April 11 to ease leverage limits on Wall Street banks, the Fed and the Office of the Comptroller of the Currency said the step might lower the amount of capital lenders are required to hold in their main subsidiaries by $121 billion. The move would give banks added flexibility to extend credit.

Deposit-Shunning Banks Get Big Break as U.S. Eases Leverage Rule[2]

It came on the heels on an announcement[3] by the...

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