Three Fed Members Not Exactly Following Bernanke's Lead

Following the August 9 meeting of the Federal Open Market Committee, the Federal Reserve released a startling statement, indicative of the overall instability in the U.S. financial and political arenas.

The Fed opted to preserve the “federal funds” interest rate at 0 to .25 percent.

Sure, a fairly low-level, but no cause for shock and awe.

Rather, the element of surprise came in the form of the ‘mid-2013’ deadline.

Federal Reserve Bank of Dallas President Richard Fisher dissented, suggesting that such action could lead to “unintended consequences” and ultimately harm growth.

The official from Texas, has served in his position since 2005 and as a voting member has dissented five times in favor of tighter policies.

He joined presidents Charles Plosser of Philadelphia and Narayana Kocherlakota from Minneapolis in posing the most opposition the policymaking leg of the Fed has seen since 1992, according to Goldman Sachs reports.

Plosser stated in a Bloomberg radio interview that this is “an inappropriate policy” at an “inappropriate time,” questioning if the ruling was in response to recent market volatility.

The three dissenters would prefer to maintain a commitment to current interest rates for an unspecified, “extended period.”

To some this may sound like simple semantics.

Yet, it is unprecedented for the Fed to precisely designate an end-date for a given policy.

Fisher said the Central Bank should never have the ability to ease monetary policy, no matter their intention to protect investors and traders, following serious stock market falls.

He explained that his ‘no’ vote is consistent with his fear for the financial sector of America, believing that job creation will be limited and business uncertainty will only be exacerbated in light of fiscal trouble in the nation’s capital.

Plosser and Kocherlakota seemed more apprehensive about inflation than Fisher, despite his reputation as an “inflation hawk;” the third amigo in the dissenting brigade stated, “my concern is not with immediate inflationary pressures.”

Fisher said, “…the cheap and abundant liquidity we have made available is presently lying fallow…” adding that political leaders must take the reins on the nation’s “runaway deficits and public debt accumulation.”

Furthermore, pledging to hold down interest rates signals to the market and public at large that the Fed has given up on economic recovery.

To some, the Fed’s policy change could be interpreted as non-political, to avoid the subject in campaign debates. Others posit that it could be an overtly political move to benefit President Obama’s re-election.

Despite the speculated political agenda, or lack thereof, equities underwent swings last week that were unprecedented in the history of the American stock market according to data compiled by Birinyi Associates Inc., Bloomberg and Howard Silverblatt senior index analyst at Standard & Poor’s.

Stocks plunged Thursday while Treasuries rallied, pushing yields to record lows amid growing signs the economy is decelerating and speculation that European banks lack sufficient capital. And there was no relief on Friday with the Dow giving up another 173 points to finish the week near the lows of the current decline.

For Fisher and his co-dissenters, the easy way out may be no way out of the nation’s fiscal worries at this time.

“No amount of monetary accommodations can substitute for that needed clarity,” he said.

 

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