Inflation-Hawk Dissent Growing In The Fed

As excerpted is growing within Fed ranks.

The most vocal dissident is Thomas Hoenig, president of the Federal Reserve Bank of Kansas City and the Fed’s longest-serving policymaker, who has twice formally objected to the Fed’s “extended period” language. That commitment plus zero rates, he explained on April 7th, lead “banks and investors to search for yield… take on additional risk [and] increase leverage”. He argued the Fed should soon raise rates to 1% to “end the borrowing subsidy”.

The next day Narayana Kocherlakota, president of the Minneapolis Fed, voiced a different concern: that the excess bank reserves created by the Fed’s MBS purchases create the potential for high inflation. He advocated selling $15 billion-25 billion of MBS a month, which would clear the Fed’s inventory in five years instead of the 30 it would take for the bonds to mature.

The rest of the Fed and its chairman, Ben Bernanke, have listened politely but are not ready to drop or even water down the “extended period” language, much less raise rates. Dropping the commitment would be tantamount to a tightening of monetary policy as bond yields rise in anticipation of short-term rate hikes. Mr Bernanke has already said the Fed would eventually sell some MBS, but not now. By pushing up long-term rates that too would be a tightening of monetary policy.

As the article further notes, there might as well be a lone hawk as far as the majority is concerned. The new vice-Chair, Janet Yellin, is a known dove. One of the Fed's favourite metrics, bank credit (including consumer credit), is still shrinking. There isn't much hard evidence on the hawks' side as of yet, which suggests the Fed will stay the course for now.

Even though the central bank to the north, the Bank of Canada, is already gearing up for a rate hike of its own.

Handicapping The Telegraphing

The consensus expectation for the telegraphing of a future Fed Funds rate hike, according to a Marketwatch report webbed by Yahoo! Finance, is April. Next month, according to that handicapping, the Fed's releases will no longer use the term "extended period" for its zero-interest-rate policy.

Continued positive economic data may serve as the catalyst for Fed officials to end the "extended period" pledge in April, Fed watchers said.

Altering the wording would be a clear signal that the Fed is more sanguine about the economic outlook and believes ultra-low rates are no longer necessary -- and financial markets would react accordingly.

For the time being, however, the Federal Open Market Committee "will stay the course" and not make significant changes to the wording of the statement, economists at Barclays Capital said.

We'll see at 2:15 PM...