Today the FOMC announced that rates would stay unchanged, though more significantly was the fact that there wasn’t even a slight change in language.
It was, as several folks noted, a copy & paste job.
But even if you think it’s too early to take the training wheels off the economy (and several folks think that, including Jan Hatzius at Goldman) there’s reason to be concerned about the Fed’s consistency.
Despite the recent round of rampant dovishness out of the Fed, we believed the FOMC should have taken “baby steps” towards tightening language and restored the 100 basis point spread between the Discount Rate and the Fed Funds rate. Needless to say, the FOMC did not see the situation as we do. The Fed decided to remain with the status quo.
Not that he expects an imminent tightening, but…
We have always asserted that the earliest potential timing for a real tightening move is the end of 2010, but it would be more likely that rates do not rise until 2011. Nonetheless, when it comes to the use of words and jawboning, the FOMC cannot be permitted to fall into the same pattern as 2002-2005. During that time period, for 29 consecutive FOMC meetings, the statement used the word “accommodative” to reference monetary policy.
It is widely believed among the investment community (ourselves included) that such predictability of interest rate policy over the course of years fuelled the housing bubble, credit bubble, SIV’s and reckless carry trades. The Fed Chairman does not share this view, he still blames the “global savings glut,” but we remain convinced it was the leverage. The “exceptionally and extended” language in its current form has been in the statement for just over a year, or 9 meetings. But remember, the current level of monetary policy is “accommodative” on steroids.
O’Rourke goes on to voice support with the Fed’s one dissenter, KC President Thomas Hoenig who, if you recall, recently leveld a blistering attack on ZIRP.
Hoenig’s basic view is simple and important. Seeing bubbles ahead of time is nigh impossible. But that doesn’t mean we can’t be smart enough to know the policies that lead to them, and free money is one such policy.
Business Insider Emails & Alerts
Site highlights each day to your inbox.