From year to year it is a different wolf, but a lonely one nonetheless. Previously, the role of the lone wolf was played by Thomas Hoenig from the Kansas City Federal Reserve Bank. Going it alone today in Washington is Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond.
Lacker is a member of the Federal Open Market Committee, which sets monetary policy for the nation. The FOMC meets every six weeks or so to discuss the economy and determine the appropriate level for interest rates, among other financial issues.
The committee is chaired by Ben Bernanke and consists of 12 members: the Federal Reserve Board of Governors; the president of the Federal Reserve Bank of New York; and four of the remaining 11 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.
For many years, the committee has been shorthanded because appointments to the board have been held up. Fed governors are nominated by the president and confirmed by the Senate for a 14-year term. The board should have seven members, but two seats are empty.
Since the financial crisis of 2007-09, through the recession that followed, and continuing through weak economic conditions today, the FOMC has had to work with less input than the rules authorize.
Without much dissent, the FOMC seems stuck in a rut. For months, the FOMC has published reports after each meeting that read pretty much the same. The 10-member group still believes the economy is operating at “low rates of resource utilization” and inflation is “subdued.”
Under such conditions, they think interest rates should remain near zero “at least through late 2014.” While the forecast may turn out to be accurate, many economists think this multiyear commitment to low interest rates will ignite inflation.
The lone wolf of the committee, Lacker, is the only policymaker sounding the alarm. He voted against this long-term policy, arguing that economic conditions are not likely to “warrant exceptionally low levels” for interest rates.
The economic condition of concern to Lacker is inflation, which has picked up as of late. The Consumer Price Index increased 3.1 percent in 2011, holding near that annualized rate through the first few months of 2012.
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 2.4 over the last 12 months.
Activity in the financial markets also suggests inflation is turning upward.
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. The yield spread, or the difference between the yield-to-maturity on 10-year and 2-year Treasury debt, is over 1.9 percent. This is up from only 1.6 percent at the end of January.
Jeffrey M. Lacker of the Richmond Federal Reserve bank realizes the risk of inflation is rising.
President Obama and the Senate must fill the board seats. With a full committee, dissent is more likely, and the FOMC may see the need for a change in policy to stave off inflation.
PETER CRABB Professor of finance and economics at Northwest Nazarene University in Nampa