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Disagreeing to Agree

By: Bill Poquette

Since the Federal Open Market Committee announced the launch of a third round of quantitative easing last month, Federal Reserve officials have been arguing in public over the wisdom of applying more of such nontraditional monetary policy tools.

FDIC Director Thomas M. Hoenig, who famously dissented several times while he was president of the Kansas City Fed and a voting member of the FOMC, would welcome the disagreement within the committee.

The only FOMC voting member dissenting recently has been Jeffrey M. Lacker, president of the Richmond Fed. Following the committee’s Sept. 12–13 meeting, he said, “I dissented because I opposed additional asset purchases at this time. Further monetary stimulus now is unlikely to result in a discernible improvement in growth, but if it does, it’s also likely to cause an unwanted increase in inflation.”

Dallas Fed President Richard W. Fisher laid out his worries in a speech at the Harvard Club of New York City on Sept. 19. “We are blessed at the Fed with sophisticated econometric models and superb analysts,” he said. “The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 banks, really knows what is holding back the economy.” Likewise, “Nobody has the experience of successfully navigating a return home from the place in which we now find ourselves,” he added.

Among those on the other side of the issue is New York Fed President William C. Dudley, who offered his view while speaking at a New Jersey chamber of commerce meeting: “In this situation, I concluded that our policy framework means that further monetary policy easing was appropriate provided that the benefits of using the tools available outweighed the costs. In my judgment, this standard has been satisfied here. I am confident that the costs are manageable, based in part on the experience we have of using the tools these past four years and that the benefits substantially exceed the costs, recognizing, of course, that our actions are not so powerful that they will instantly transform the economic outlook.”

Eric S. Rosengren, president of the Boston Fed, argued as follows before a Massachusetts business group: “Absent further policy action, most economists expect several more years of weak labor markets and low inflation. As a consequence, it was time for the Fed to announce stimulus that will continue until the U.S. achieves both faster economic growth and lower unemployment, no matter the unanticipated interruptions.”

The Chicago Fed’s president, Charles Evans, would agree. “This was the time to act,” he said at a bank breakfast in Ann Arbor, Mich. “With the problems we face and the potential dangers lying ahead, it is essential to do as much as we can now to bolster the resiliency and vibrancy
of the economy.”

Who’s right? I like the candor of the Dallas Fed’s Richard Fisher. I also like the way Sandra Pianalto, president of the Cleveland Fed and a voting member of the FOMC, assesses the dilemma. Speaking at a Central Ohio business luncheon in late August, she put it this way: “The FOMC’s policy actions to date have been important economic stabilizers and have acted to support the expansion. Yet today, we still find ourselves in a challenging economic environment, one in which we continue to rely on nontraditional policy tools. These new tools come with benefits and with risks ... and we must constantly weigh both in our efforts to meet our dual mandate of maximum employment and stable prices.”

Bill Poquette is editor-in-chief of BankNews.

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