Even though the Federal Open Market Committee voted this week to keep its target federal funds rate in the range of zero to 0.25 percent for the next six weeks, not all members were on board with the decision.
In its statement, the Committee made it clear that it anticipates that “economic condition…are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” As evidence for the need for continued low rates, the Committee said that “the pace of recovery in output and employment has slowed in recent months,” citing high unemployment, depressed housing start levels and decreased bank lending.
But Federal Reserve Bank of Kansas City President Thomas Hoenig is not sure that means the target rate needs to stay so low. He and several non-voting Fed presidents are more concerned with inflation than with bolstering the economy.
“Monetary policy is a useful tool, but it cannot solve every problem faced by the United States,” Mr. Hoenig said in a speech to the local Chamber of Commerce at the University of Nebraska, Lincoln, as quoted in the New York Times. “In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long.”
He added, “In judging how we approach this recovery, it seems to me that we need to be careful not to repeat those policy patterns that followed the recessions of 1990-91 and 2001. If we again leave rates too low, too long, out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring.”
Hoenig says he doesn’t want a tight monetary policy but rates that move slowly upward as the economy begins to heal.
However, Hoenig being the only dissenting voter on the Committee currently, and with most Fed members much more concerned with the real threat of deflation than skyrocketing inflation in the near future, things are not likely to change much in the coming months.