It’s no longer unanimous, but the dissenter at the Fed is standing alone.
This week the Federal Open Market Committee decided to keep interest rates near zero. According to the statement released after its two-day meeting, the federal funds rate (the interest rate banks charge each other when borrowing or lending) will remain between 0 and 1/4 percent.
The FOMC is charged with setting the monetary policy of the United States. The committee consists of the members of the Board of Governors of the Federal Reserve System and five Reserve Bank presidents. The committee meets eight times a year, or as needed.
The committee is currently shorthanded. By constitution and charter the Board of Governors of the Federal Reserve System should have seven members. Two seats are empty. Governors are nominated by the president and confirmed by the Senate for a full term, which is 14 years.
All the recent talk over whether or not Ben Bernanke will be reconfirmed as chairman by the Senate is a distraction from the real need – more board members. The FOMC has been working for years now with less input than the rules authorize.
The FOMC is chaired by Bernanke and consists of 12 members: the Board of Governors; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. Since there are currently only five board members, the FOMC is missing two opportunities for valuable contributions related to the state of the economy and financial market conditions.
This week’s FOMC meeting was apparently much like the past few. The 10-member group is still forecasting “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.” Under these conditions the Fed thinks interest rates should remain low for “an extended period.”
All this was not much of a surprise to most economic forecasters and Fed watchers. However, Kansas City Fed President Hoenig surprised us with a dissenting vote on the decision. Specifically, Hoenig objected to the "an extended period" language. According to the statement, he believes economic and financial conditions have changed sufficiently.
They have! And if there were two more professionals at the meeting they may have concurred with the representative from Kansas City.
Resource utilization is growing. U.S. industrial production increased 0.6 percent in December. While there are declines in many consumer spending areas as households cut back, production for business equipment rose 0.9 percent.
Inflation is back. The Consumer Price Index (CPI) rose 2.7 percent in 2009. Even the housing component of the CPI was positive, albeit a small 0.3 percent, for the entire year — a big change from 2008.
The CPI also tracks inflation by metro areas. In Western cities, like Boise, the inflation rate is somewhat lower. The sub-index in the CPI for Western cities our size was 2.6 percent for 2009.
The outlook for inflation is also up. Inflation expectations as measured by what bond investors are willing to accept in return for holding U.S. Treasury debt are nearly double what they were this time last year. In a report for The Wall Street Journal this week, Tom Lauricella reported that the bond market indication for inflation, or implied inflation, exceeds 3 percent over the next decade.
According to Bankrate.com, five-year certificates of deposit from Idaho banks average less than 3 percent. With greater than 3 percent inflation, Idaho savers are certain to be disappointed when it comes time to spend these savings for a new home, a child’s education, or retirement.
Thomas Hoenig of the Kansas City Federal Reserve banks realizes this fact. President Obama and the Senate must fill the Board seats. With a full committee, dissent is more likely and the Fed will start raising interest rates to stave off inflation and protect the value of our dollar.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.