“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, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.