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  Bring Back Hoenig

CORRECTION: In our original commentary, we mistakenly stated that Kansas City Fed Bank President Thomas Hoenig rotated off the FOMC and retired at the end of 2010.  While President Hoenig is no longer a voting member of the FOMC, he is still the President of the Kansas City Fed, and will not retire until later this year.

Get out your carbon paper.  No matter how much evidence there is that both real economic growth and inflation are accelerating, the Federal Reserve is determined to issue policy statements that read like the pessimistic ones from prior meetings.

As everyone expected, the Fed made no direct changes to the stance of monetary policy today, leaving the target range for the federal funds rate at 0% to 0.25%.  In addition, the Fed maintained its pledge to keep the funds rate at this level for an "extended period."  The Fed also reiterated its commitment – initially made in early November – to purchase $600 billion in long-term Treasury securities by mid-2011.  These purchases are on top of reinvesting (into long-term Treasury securities) principal payments on its pre-existing portfolio of mortgage securities.

The Fed only made minor changes to its statement.  First, by saying economic growth was "insufficient to bring about a significant improvement in labor market conditions," the Fed implied that there was some improvement in the employment situation (just not "significant" improvement).  Second, the Fed acknowledged that consumer spending "picked up late last year."  Third, the Fed deleted language from the December statement that the growth of business investment had slowed down.  Last, the Fed noted higher commodity prices, but did so in a sentence that signaled it will put greater weight on long-term inflation expectations and measures of "core" inflation (which exclude food and energy). 

The biggest disappointment in today's statement was the complete absence of any dissent by any member of the Federal Open Market Committee.  Kansas City Fed Bank President Thomas Hoenig both rotated off the FOMC and retired at the end of 2010, leaving a gaping chasm for monetary probity and restraint.  Over the prior year, Hoenig had consistently dissented in public against high levels of monetary accommodation, including the Fed's latest round of quantitative easing.  We miss him already.   

Click here to view the entire commentary.
Posted on Wednesday, January 26, 2011 @ 2:31 PM • Post Link Share: 
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