Draw in Your Talons, Oh Hawkish Ones!

August 9th, 2011 at 6:06 pm

I’m waiting for someone with too much time on their hands to confirm this, but I wouldn’t be surprised if today’s Fed report was the first time three voting members of the Board of Governors dissented.  It’s getting to be like the House of Representatives over there!!

And what was their issue?  As far as I can tell, they lost the fight against specifying the length of the “extended period” in which the Fed would not raise interest rates, which we now learn could last until mid-2013. 

They’re worried about inflation but really, is that a reasonable fear in an economy with so much excess capacity, with GDP growth below 1% over the first half of this year, and over 16% of the workforce un- or underemployed?

Here’s a picture of a version of inflation that the Fed likes to look at—it’s the year-over-year change in the “market-based” personal consumer price index, leaving out food and energy.  The Fed likes it because it leaves out components that are either less accurately measured (mostly imputed/made up prices…don’t ask) or too volatile to provide reliable info on price pressures.

Source: BEA

Yes, there’s some acceleration at the end of the series, but a) from such a low level—well under the Fed’s 2% eyebrow-raising zone, b) just in the past few years you can see similar periods of acceleration that ultimately died out, and c) a little core inflation in the system is a good thing–it translates into lower real interest rates, which helps stimulate investment; it also makes life a little easier on those with debt burdens, as they can pay back loans a little more easily.

In terms of price pressure in this economy: nothing to see here folks…move along.

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7 comments in reply to "Draw in Your Talons, Oh Hawkish Ones!"

  1. foosion says:

    Reportedly, the last time there were three dissents was Nov 1992. LaWare, Jordan and Melzer

    I saw it earlier on twitter, so no search needed 🙂


  2. Matthew says:

    Just a thought which may be of some use; Perhaps the dissent was not over inflated concerns about inflation, but rather the predicament of whether to deliberately meddle with long term expectations of the market. ie. By setting a relatively fixed date, has the Fed set a precedent for the market with regards to semantics?

    The answer is yes, though the impact, if any, is far from clear. In the future if the Fed announces a new round of QE, and they don’t provide a specified end date or magnitude, will the market react differently as a result of the specificity used in the low rates language?

    It seems plausible that the dissension was related to deviating from the norm, rather than inflationary concerns. Of course the incredibly abnormal state of things doesn’t support adopting standard practice, never-mind voting against a minor material change in a fairly unprecedented way.


  3. foosion says:

    Here’s the minutes of the meeting. See the vote and statement beginning at the bottom of page 3.



  4. D. C. Sessions says:

    Since the Fed’s effective inflation target is set to hold real-dollar wages constant [1], it follows that any signs of falling unemployment will trigger a swift tightening policy.

    I’m just a wee bit surprised that even the current job market is too tight for several of them.

    [1] To give them their due, they’ve done a splendid job for the last thirty years.


  5. Michael says:

    Three members of the Fed remembered that there is a Dem in the White House who is up for reelection.

    The others figured he was toast anyways.


  6. apj says:

    that blip up in the core CPI (to only 1.6% mind you…) is just that. It’s about to head lower again.

    Clearly the dissenters didn’t see that the output gap was reported to be WAY bigger than the ORIGINAL way-big number. I thought these people were supposed to be intelligent. it’s all so dreary…


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