The Lady Who Votes Against Bernanke and Other Fed Members

The latest Fed statement is out and it is more of the same.

The Fed will continue its $85 billion bond buying program and the Fed says price inflation is below its 2% target, while the MIT Billion Prices Index shows price inflation around 2.5%,

One FOMC  voting member, Kansas City Fed President Esther George, continues to vote against current Fed policy. Here's how the Fed reported the vote at today's meeting:

 Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Why does she vote this way? George gives few speeches, but she did deliver a speech in June where she discussed her views. She is far from a hard money person, but her speech does contain some concern about the current massive additions to the monetary base. The speech, if anything, provides a clue as to how money printing oriented the remainder of FOMC members must be, if the pushback against mad money printing is only represented George's call for a slowdown in money printing. The below is from her June speech.

With the economy improving and with monetary policy having been extraordinarily accommodative for nearly half a decade, the world, it seems, is holding its breath as it waits to learn when the FOMC might adjust its current policy settings. This anxiety follows in part from the fact that a number of global economies have come to depend on central banks to provide unprecedented amounts of money to engineer growth and influence asset values, fearing otherwise that deflation would take hold.

In the United States, for example, the Federal Reserve has added more than $2 trillion in
Treasuries and agency-MBS securities to its balance sheet over the past five years and continues to add $85 billion each month. To varying degrees, these actions have influenced asset prices,supported financial markets and boosted household wealth.

These unconventional actions also bring their own uncertainty about the outlook for the
economy and increasingly appear to be viewed by markets and the public as “conventional.” As a result, several sectors in the economy are becoming increasingly dependent on near-zero short term interest rates and quantitative easing policies. For example, debit balances in security margin accounts at broker-dealers hit an all-time high in April of this year. The rise in thesebalances indicates that investors are borrowing at very low rates of interest to purchase riskier financial assets. Presumably, some investors are pursuing this strategy because they anticipate that loans will continue to be available at very low rates of interest, which will allow them to ride out any market volatility. Likewise, an extended period of low rates is causing investors to be more aggressive about seeking out higher-yielding and riskier assets in the leveraged loan market. Leveraged loans are packages of higher-risk commercial loans, which hit an all-time high in the first quarter of this year.

These issues, among others, raise a most important question for the FOMC about when to shift its policy focus to the longer run and what steps should be taken now that will return the economy to a state less dependent on monetary stimulus.

Like others, I want to see the U.S. economy grow with healthy job creation. Without question, more progress is needed in our labor market. While monetary policy affects inflation and financial stability and influences employment, it cannot singlehandedly fix today’s high unemployment. That will take additional time. In maintaining its present course, the FOMC must consider other possible unintended consequences. For example, Will continuing with current policy and the creation of even greater excess reserves in the banking system result in more lending and economic growth or merely invite asset misallocation? Are we creating a path to stable long-term growth or fostering uncertainty about the impact to the economy when the Federal Reserve must unwind its balance sheet?

Given these dynamics, and in light of improving economic conditions, I support slowing the pace of asset purchases as an appropriate next step for monetary policy. Moreover, such actions would not constitute an outright tightening of monetary policy, but rather, it would slow policy easing. History suggests that waiting too long to acknowledge the economy’s progress and prepare markets for more-normal policy settings carries no less risk than tightening too soon.

In other words, a slowing in the pace of purchases could be viewed as applying less pressure to the gas pedal, rather than stepping on the brake. Adjustments today can take a measured pace as the economy’s progress unfolds. It would importantly begin to lay the groundwork for a period when markets can prepare to function in a way that is far less dependent on central bank actions and allow them to resume their most essential roles of price discovery and resource allocation.