Today is Fed appreciation day with three speakers including the big guy, Ben Bernanke, are having a go at explaining their outlook for monetary policy. To be honest, I’m more interested in what Tom Hoenig has to say especially since he continues to dissent.
During the Greenspan era, the lack of dissent was detrimental to the policy making by the central bank. The recent interview by former Fed chairman Alan Greenspan is instructive when you only think with one mind: Referring to the housing bubble, “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”
Given the success of Michael Lewis’s book, “The Big Short,"I would argue there were a few out there that did see it coming. The question is why was this information not considered by the central bank? My guess was a group think was present that didn’t allow for it and I believe that Hoenig is doing his best now to overcome a return to this mindset.
Yesterday, we got the Fed minutes from its March meeting and more detail on Hoenig’s dissent.
“Mr. Hoenig dissented because he believed it was no longer advisable to indicate that economic and financial conditions were likely to warrant “exceptionally low levels of the federal funds rate for an extended period.”
Mr. Hoenig was concerned that communicating such an expectation could lead to the buildup of future financial imbalances and increase the risks to longer-run macroeconomic and financial stability. Accordingly, Mr. Hoenig believed that it would be more appropriate for the Committee to express its anticipation that economic conditions were likely to warrant “a low level of the federal funds rate for some time.”
Such a change in communication would provide the Committee flexibility to begin raising rates modestly. He further believed that making such an adjustment to the Committee’s target for the federal funds rate sooner rather than later would reduce longer-run risks to macroeconomic and financial stability while continuing to provide needed support to the economic recovery.”
Since the long end of the yield curve is backing up and the curve is extremely steep, one has to believe the market is reflecting the massive supply of securities as well as the increase in economic growth and a potential inflation increase. The inflation aspect is not well grounded as the TIPS spreads, the drop in average hourly earnings, and inflation expectation numbers show little reason to be concerned….for now. Two to three years from now is a different story and that’s where inflation will show up.
I think the Fed will begin to raise rates in September, but that they will be willing to err on the side of higher inflation further out. The point is that the markets are moving and will continue to move ahead of the Fed. Therefore, don’t look to the Fed for forward looking analysis or insight.
Watch the yield curve.
Andrew B. BuschDirector,