Kansas City Fed President Thomas Hoenig and the rest of the Fed may just have to agree to disagree.
Hoenig (right), a voting member of the Federal Open Market Committee, dissented from the Fed’s interest-rate policy statement for the fifth straight time Tuesday.
The FOMC voted 9-1 to keep its short-term interest-rate target near zero and to indicate it intends to keep it there for an “extended period.” And as he has at every regular meeting this year, Hoenig said he opposed that language on the grounds that it limits the board’s flexibility to raise rates once a recovery finally takes hold.
Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed.
Hoenig’s stance is noteworthy not just because dissent is unusual on the FOMC. The clash comes as the rest of the Fed is growing concerned about the health of the economic recovery, as expressed in Tuesday’s decision to reinvest the proceeds the Fed receives on its mortgage securities holdings into new Treasury bond purchases.
The goal is to keep the Fed’s balance sheet from shrinking, which would have the effect of making money tighter at a time when policymakers are worrying about imminent cutbacks in government spending and their impact on the economy.
But Hoenig dissented with that decision too. The FOMC statement said Hoenig “did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.”
One of these days, Hoenig and the rest of the FOMC may see eye to eye. But with the Fed seemingly on a course for more easing and Hoenig’s voting seat expiring at the end of the year, don’t hold your breath.
