Some opposition is starting to stir among Federal Reserve policymakers to the central bank’s stance on keeping interest rates low for an “extended period.”
Some analysts even think the Fed will drop the “extended period” language from its next policy statement expected Wednesday.
Kansas City Fed President Thomas Hoenig is the most outspoken opponent to current policy, voting twice against the “extended period” phrase.
“Low rates over time systematically contribute to the buildup of financial imbalances by leading banks and investors to search for yield,” he said in a recent speech.
That yield search then pushes banks to take greater risk using leverage. The ultimate result: “Perhaps a bubble and financial collapse,” Hoenig said.
He believes the Fed should boost the federal funds rate to 1 percent from the current range of zero to 0.25 percent.
Minneapolis Fed President Narayana Kocherlakota is worried that the Fed’s $1.25 trillion in purchases of mortgage-backed securities will cause inflation, The Economist reports.
That’s because of the bank reserves the central bank has created by buying those securities.
However, the rest of the Fed hasn’t shown an inclination to go along with the dissidents.
While the Fed’s policymaking panel is likely to upgrade its economic outlook at this week's meeting, “I don’t think we are going to see any change (in the ‘extended period’ language),” Goldman Sachs economist Ed McKelvey told the Financial Times.
“I think it’s a bit early for that.”
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