MISH: Dissent at The Fed: 7 out of 17 have Reservations about Quantitative EasingSubmitted by bobbyw24 on Tue, 08/24/2010 - 10:38
Beneath the surface of a 9-1 vote in favor of continued quantitative easing, 7 of 17 Fed officials at the last FOMC meeting had at least some reservations about Bernanke's policy.
The Wall Street Journal reports Fed Split on Move to Bolster Sluggish Economy
The Aug. 10 meeting of top Federal Reserve officials was among the most contentious in Ben Bernanke's four-and-a-half year tenure as central bank chairman. With the economic outlook unexpectedly darkening, the issue was a seemingly technical one: whether to alter the way the Fed manages its huge portfolio of securities.
At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.
Officials were clustered in two camps. In one camp, Mr. Dudley, and the presidents of the Boston and San Francisco Fed banks, Eric Rosengren and Janet Yellen, were distressed that the Fed was far from its objectives of low unemployment and stable inflation.
Richard Fisher, president of the Dallas Fed, and others expressed a concern that Fed moves might be ineffective, arguing that businesses weren't using already ample, cheap credit to fund investments because they were uncertain about many other problems, including government deficits and new financial regulations.
Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today's unemployment problem is caused by issues the Fed can't solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted. "The Fed does not have a means to transform construction workers into manufacturing workers," Mr. Kocherlakota said in a speech after the meeting.
The president of the Philadelphia Fed, Charles Plosser, who has had misgivings before about Mr. Bernanke's initiatives, deemed the latest move premature because, though the Fed was lowering 2010 growth estimates, it wasn't significantly ramping down its estimates for growth in 2011 and beyond. Two other frequent dissenters, Thomas Hoenig of Kansas City, and Jeffrey Lacker of Richmond, Va., also objected. Fed governor Betsy Duke, a former commercial banker, also expressed reservations, according to participants.
Fed Worried Balance Sheet Might Shrink Too Fast
The concern of Bernanke and other Fed officials was the Fed's balance sheet might shrink too fast. According to the New York Fed, as much as $340 billion would be paid back including $55 billion Fannie and Freddie mortgages.
A shrinking portfolio in the face of slowing economic growth amounted to "prematurely applying the brakes" according to New York Fed President William Dudley.
Excuse me for asking but how the hell does repayment of Fannie and Freddie loans (with consumers refinancing at lower rates) constitute tightening?
Only in the perverted world of Fed minds with government backstopping all losses at Fannie and Freddie could mortgage paybacks be construed as tightening. The same applies to any balance sheet assets paid back because of favorable bond market conditions.
Indeed, the Fed should be thrilled to get rid of garbage on its balance sheet at a time when mortgage rates are dropping.
Exit Strategy Blown
Note how the Fed blew a chance at an exit strategy handed to them on a silver platter. They are unlikely to be so lucky down the road.
Quantitative Nothingness vs. Quantitative Easing