What’s in a dissent? Quite a lot, potentially. Thomas Hoenig, the notoriously hawkish president of the Kansas City Federal Reserve Bank, had already disagreed at the last FOMC meeting on the reference to an “extended period” of low interest rates – saying the economy was strong enough that higher rates could be contemplated at some point sooner. Mr Hoenig disagreed again with his colleagues today, but elaborated on his reasons for doing so. It was not for fear that low rates could lead to a spike in inflation, as one might think, but rather because of concerns over a potential new asset price bubbles. “It could lead to the buildup of financial imbalances and increase the risks to longer run macroeconomic and financial stability,” the Fed said in the last line of its statement, explaining Mr Hoenig’s position.
This could open up a whole can of worms. Although certain asset price bubbles can be inflationary for the economy as a whole, there may be a debate about whether considering financial stability on its own when crafting monetary policy is consistent with the Fed’s dual mandate under law, which is to maximize employment while maintaining stable prices. Purists might argue it is not, others might argue that it is.
Thomas M. Hoenig, President of the Federal Reserve Bank of Kansas City, showed little love for the unemployed today in his speech to the Peterson-Pew Commission on Budget Reform Policy Forum.
The inflation hawk – the sole dissenter at last month’s FOMC meeting – called for a reduction in the deficit and said the time to start slashing is now.
“The responsible path to sustainable economic growth with price stability…[is to] act now to implement programmes that reduce spending and increase revenues to a more sustainable level.”
Ok. But it’s also true that the recession itself added to the budget deficit, with spending on social programmes (like unemployment insurance) rising and tax revenues (from the unemployed) falling. Borrowing for these programmes, in turn, raises our debt servicing payments into the future.
So a continued high level of unemployment now is likely to contribute to higher debt in the future, an argument for which Mr Hoenig shows little sympathy.
The post-Lehman Fed unanimity has finally been broken. The Fed again voted to keep interest rates unchanged in the 0 to 0.25 per cent range for an ‘extended period.” But now, dissent!
Thomas M. Hoenig, the Kansas City Fed president, used his new voting powers to vote against today’s action, saying, according to the minutes, that “economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.”
A confession: I missed the Fed’s regulatory guidance to banks on interest rate risk yesterday. Some have misread this as a hint that rate increases are coming soon. I think that is the wrong take.
Bernanke and Kohn have talked about using regulatory tools rather than interest rates in the first instance to combat future bubbles and avoid the build-up of financial excesses. The latest guidance looks to me to be a very modest example of this -not a signal on rates.