Thursday, December 3, 2009

A (Fed) house divided

Abraham Lincoln famously said that “a house divided against itself cannot stand.”

Today, we may have that exact state at the Federal Reserve. I finally go around to reading the last FOMC minutes. While there was great debate between the hawks and the doves, here is the position of the hawks about inflation risks [emphasis mine]:

But others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public's concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation.

Wait a minute, did they just say that? The Wall Street Journal reported that there is around $1 trillion of excess reserves sloshing around in the banking system, which is indicative that banks don’t want to lend, and these guys are afraid of bank lending?

Maybe I am just dense but the position of the hawks appear to be inconsistent to me. Why did they vote for quantitative easing?

The current situation reminds me of the old Steve Martin/Lily Tomlin comedy All of Me, where Tomlin’s character was trapped inside Martin’s body but neither has complete control.

Meanwhile, you have the likes of
Bullard of the St. Louis Fed asserting that the recent commodity price spikes are not inflationary. No wonder there are such differences of opinion about the outlook at the Fed.

What's more, I see that Sen. Bernie Sanders said that he has placed a hold on the nomination of Ben Bernanke for a second term as chairman of the Federal Reserve.

A (Federal Reserve) house divided indeed, what does that say about its policy?

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