Wednesday, January 27, 2010

Hoenig Dissents Over FOMC’s ‘Extended Period’ Pledge on Rates

From Bloomberg:
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, has called for an increase in the benchmark interest rate “sooner rather than later” in two speeches since October. Today, he brought the message to his fellow policy makers in Washington.

Hoenig dissented from the Federal Open Market Committee’s pledge to keep rates “exceptionally low” for an “extended period.” It was the first dissent since January 2009, when another regional Fed bank president, Richmond’s Jeffrey Lacker, opposed “targeted credit programs.”
I appreciate Hoenig's view that the Fed should always be battling inflation, but money supply (M2) growth has been minimal and it appears to me that the real interest rate (the non-manipulated rate) is already above the Fed funds target rate. The effective funds rate is 0.12%, the 3 month T-bill rate is at 0.08%. Nobody is going to borrow money at 0.12% to invest it at 0.06%. Yet, there must be plenty of non-Fed money available to keep the T-bill rate so low. I marginal hike in the effective Fed Funds rate would probably result in the start of shrinking money supply.

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