WASHINGTON, March 13 (Reuters) – Some Federal Reserve insiders are breaking ranks in alarm over action by the U.S. central bank to tackle the credit crisis, but this unusually blunt display of dissent will not force a reversal in policy.
Fed Chairman Ben Bernanke has made plain that he will not allow orthodox central banking concerns about inflation or market intervention prevent the U.S. central bank from doing what it has to do to confront a savage economic downturn.
As a student of history, Bernanke also knows that it was supposedly sound, healthy monetary principles that led the Fed to cut the money supply in the 1930s, putting the “great” in “Great Depression” — a mistake he has vowed not to repeat.
“I made my own mistakes, but I don’t want to make somebody else’s mistakes,” Bernanke told the Greater Austin Chamber of Commerce on Dec. 1. Fed watchers say this translates into an absolute determination to overcome opposition within the central bank.
“Bernanke is so committed to using all the resources at the Fed’s disposal to deal with these credit problems that in the final analysis he will go ahead with what he thinks needs to be done. And he’ll have enough support on the committee to do that,” said former Fed Governor Lyle Gramley.
Three regional Fed Bank presidents have sharply criticized the Fed leadership in recent weeks, including one who is a voter this year on the Federal Open Market Committee (FOMC), and who dissented at the last meeting on January 27-28.
Indeed, the chances that Richmond Federal Reserve President Jeffrey Lacker will dissent again at the upcoming policy gathering next week sounded high after he slammed Fed colleagues for measures that he fears risk its independence.
The Fed’s policy-steering committee meets March 17-18 with a statement about their decision due around 2:15 p.m. (1815 GMT) on Wednesday. It is expected to leave the target for its benchmark overnight funds rate unchanged at zero-0.25 percent.
Lacker wants the Fed to boost the economy by buying longer-term Treasuries instead of private-sector debt.
This concern was echoed by Philadelphia Fed President Charles Plosser, who wants to get private assets off the Fed balance sheet in order to improve its flexibility to shrink the monetary base when it is time to worry about inflation.
BOARD VS REGIONAL FEDS
“One voting president that dissents, in my view correctly, will not change policy – Bernanke gets his way. Plosser and Lacker are making an important point,” said Lee Hoskins, president of the Cleveland Fed between 1987-1991.
“Monetary policy is being made by the Board of Governors, not the FOMC. The (Board) lending programs drive the Fed balance sheet and money growth. The FOMC is not making policy,” said Hoskins, who is a senior fellow at the Pacific Research Institute in San Francisco.
The Board of Governors in Washington, headed by Bernanke, wields emergency powers to respond to “unusual and exigent” circumstances that it invoked last year to rescue investment bank Bear Stearns and bail out American International Group (AIG.N) to the tune of $180 billion.
The FOMC, whose members include the Board as well as the 12 regional Fed bank presidents, sets monetary policy.
But with Fed interest rates already almost zero, the focus has shifted to stimulating the economy by increasing the U.S. monetary base by expanding the Fed’s balance sheet. That balance sheet has more than doubled in size to around $1.9 trillion.
The bailouts have caused particular concern. Kansas City Federal Reserve Bank President Thomas Hoenig, one of the longest serving members of the FOMC and a seasoned bank regulator, was scathing in his criticism of the Fed’s role in propping up troubled banks.
In a strikingly outspoken March 6 speech, Hoenig warned ad hoc policy intervention aimed at avoiding the nationalization of U.S. banks had failed to quell the banking crisis and would not prevent them being taken over in the end. But his complaint is not expected to force the Fed to shift course.
“The Fed has dug a hole that it cannot get out of. There is no way that it can reverse policy and say it has made a mistake,” said Robert Eisenbeis, a former head of research at the Federal Reserve Bank of Atlanta. “The opposition won’t make any difference in this environment,” said Eisenbeis, who is now chief monetary economist at Cumberland Advisors. (Reporting by Alister Bull; Editing by Kenneth Barry)