Will the Fed's New Hawks Force a Change of Course?

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Fed Chairman Ben BernankeThe arrival of a number of inflation hawks on the Federal Reserve's interest rate-setting committee raises a question: Is monetary policy is about to be toughened from its current easy stance?

The Federal Open Market Committee (FOMC) is meeting Tuesday and Wednesday for the first time in 2011 and will issue a statement after Wednesday's session. And while most analysts don't expect a major departure from the last Fed meeting in December, the voting lineup has changed substantially.

The voting members now include Charles Plosser, president of the Philadelphia Federal Reserve, and Richard Fisher from Dallas, who both have expressed qualms about the Fed's decision to buy $600 billion in government bonds last November. In addition, Narayana Kocherlakota of the Minneapolis Fed is thought to be against the program, known as quantitative easing. Gone is Thomas Hoenig of the Kansas City Fed, who also opposed Fed Chairman Ben Bernanke's efforts to stimulate the economy.

The three newcomers can cast dissenting votes, but they can't block the bond-buying program from going forward. However, an open rebellion could rattle the financial markets.

"A More Hawkish Tilt"


"There is no question that the large-scale asset purchases are not uniformly embraced within the Fed. There are definitely differences of opinion about it," says Josh Feinman, global chief economist for DB Advisors, Deutsche Bank's institutional asset management business.

"But Bernanke and most of the people on the Fed are committed to this and will see this through to June, when they announce it will end," Feinman says. He thinks the Fed will then reassess the economy based on current data and decide whether to press ahead with another round of buying Treasury bonds.

Other analysts agree. "On the whole, the new voters appear to have a more hawkish tilt than their predecessors, but the votes that will count are that of the Fed chairman and his new vice chairman, Janet Yellen," wrote Mark McCormick, currency strategist at Brown Brothers Harriman in New York. He classified Yellen, former head of the White House Council of Economic Advisers under President Bill Clinton, as a "moderate dove."

Core Inflation Is Weak

Concerns have been raised that the quantitative easing program could unleash a wave of runaway inflation. Prices in China and Brazil have skyrocketed recently, and the worry is that their inflation will be exported back to the U.S. in the form of higher prices for consumer goods.

As a result, inflation hedges such as gold and silver have soared in the last year, and the difference between the interest rate paid by inflation-protected Treasurys and regular Treasurys has widened, indicating higher inflation expectations ahead.

But so far, those concerns have not shown up in the statistics. While the consumer price index rose 0.5% in December, its largest monthly gain since June, 2009, so-called core inflation (minus food and fuel) was a relatively weak 0.1%. For the year, core inflation was only 0.8% in 2010, well below the Fed target of 2%.

The Europeans don't share the Fed's lack of concern about inflation. Jean-Claude Trichet, the head of he European Central Bank, says he doesn't believe the core inflation number was a good predictor of future price rises. "All central banks, in periods like this where you have inflationary threats that are coming from commodities, have to be very careful that there are no second-round effects on prices," Trichet recently told The Wall Street Journal.

Employment's Hard Road

DB Advisors' Feinman says he believes the economy is recovering slowly -- not a "gangbusters recovery, but at least a better recovery than we've been having" -- and that the labor market will begin creating around 200,000 jobs a month.

Still, that doesn't mean there will be a quick end to the economic pain. Feinman says at the current rate of job creation, it would require 11 million new positions just to get back to the unemployment rate – 4.5% -- that prevailed before the financial crisis began in 2007. That reality won't change no matter who's casting votes at the FOMC meeting.

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scottee

The Fed needs to be audited and ended.

only smaller government, fewer taxes and free markets will create jobs...and Washington is doing the opposite.

career politicians in Washington are the problem, not the solution.
read the book by Sol Erdman called The Cure For Our Broken Political Process.

January 27 2011 at 8:34 AM Report abuse rate up rate down Reply
Kleestard

Don't listen to 'em Ben...Keep Printing!

January 26 2011 at 11:10 PM Report abuse rate up rate down Reply
topmind

What is the point of "easy money" - that is low interest rates - when you can qualify for a loan only when you do not need the money?

January 26 2011 at 10:58 PM Report abuse rate up rate down Reply
ectullis

Maybe maybe not but the citizens surely will.

January 26 2011 at 7:44 PM Report abuse rate up rate down Reply
wizeanne

14 trillion national debt...40 cents on dollar goes to pay it, 6 to 8 million people to lose their homes in 2011...more jobs to come...from where, who? Look at all the Fortune 500 companies who closed their factories and business' and moved to China and India. Just the same ole same old in past and present administrations, keeping all these Federal Reserve Bankers and Goldman Sachs thieves in the White House and cabinet. Timothy Gitner as Secretary of Treasury!? Came from the New York Federal Reserve Bank. Henry Paulson, Larry Summers, and after two years still not any regulations and no accountability of the Federal Reserve. It's the same power people and banking entities running this country....into the ground. Greed is NOT good! Nothing changing....except dividing our country into 10 FEMA/HLS districts and 72 detention/fusion centers and a Counsel of (10) Governors to run each district all chosen by the President. In case of a attack...foreign and DOMESTIC! "1984...George Orwell" Glad we still have our 1st Amendment right of freedom of speech....but for how long!???

January 26 2011 at 6:48 PM Report abuse rate up rate down Reply
americandoo

"THINKING OUT OF THE BOX FOR AMERICA" "THINK POSITIVE DO POSITIVE"

What this statement means to me is; to think of ways to help Everyone In America with New Positive Ideas that Will help to fix our problems, Focus On The Ball ! !
( focus on the problems at hand and come up with potential New Ideas that will help to solve Our Problems)

"LEAD BY EXAMPLE" means to; come up with Ideas to Help Americans Lead The World By Example.

"UNITED WE STAND" "DIVIDED WE FALL" (these are not just words these are facts)

What this statement means to me is; To Work Together as a Nation using Ameri-Can Do Attitudes To Stand Together, To Solve Problems In A United Way, As Americans, As;

"WE THE PEOPLE" (not divided parties, not divided people that make it difficult and almost impossible to solve even the simplest problems)

Look to nature for proof of the above statement;

Look at what Ants accomplish together as a colony as a Team Working Together, look at their unbelievable STRENGTHS & ACCOMPLISHMENTS ! !

Then; Look at the one ant that you see once in a while by himself running around in circles, confused, lost and accomplishing nothing, this is what happens when we divide.

Time to; TEAM UP AMERICA ! ! & LEAD BY EXAMPLE ! !

(Always trying to help as a Proud American in a Positive Way ! !)

Thank You, Respectfully, Michael V. Caldwell

KEEP ON WORKING TOGETHER USING AMERICANDOO ATTITUDE, MUTUAL RESPECT FOR EACH OTHER WHILE FOCUSING ON THE BALL ONLY..THIS IS WHAT IT TAKES TO KEEP AMERICA # ONE ! !

January 26 2011 at 6:09 PM Report abuse +1 rate up rate down Reply
1 reply to americandoo's comment
theendoflore

Ant's don't have to pay taxes...

January 27 2011 at 5:09 AM Report abuse rate up rate down Reply
tom

Fact Checking Rep. Ryan's State Of The Union Response
January 25, 2011 10:40 pm ET
In his televised response to President Obama's State of the Union address, House Budget Committee Chairman Paul Ryan (R-WI) repeated a series of debunked Republican talking points and attacks on Democratic policies. Among other things, Ryan absurdly claimed that the Recovery Act "failed" to create jobs, overstated Obama's role in creating the current debt, and stubbornly insisted that the Affordable Care Act will increase the deficit, even though nonpartisan experts say that he's wrong. Will not hear that on fox news...

January 26 2011 at 5:41 PM Report abuse -2 rate up rate down Reply
tom

Paul Ryans republican response, Ryan despairs over the high burden taxpayers face, Ryan's own tax plan is an idiot exacta: It slashes government revenues, while simultaneously raising taxes on 90 percent of taxpayers, reducing taxes by 15% for the wealthiest. So republican.. The interesting thing, however, is that when the Center for Tax Justice (PDF) ran the numbers, they discovered that this isn’t the kind of tax cut that makes your taxes lower. On the contrary. Most Americans will pay higher taxes under Ryan’s plan .. Only the very richest will pay less. This table sums up the essence of the Ryan Ripoff: just google ryan tax plan..a true to his masters republican..

January 26 2011 at 5:39 PM Report abuse -1 rate up rate down Reply
tom

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of their property until their children wake up homeless on the continent their fathers conquered.¬" Thomas Jefferson

January 26 2011 at 5:28 PM Report abuse -1 rate up rate down Reply
tom

Fact Checking Rep. Ryan's State Of The Union Response
January 25, 2011 10:40 pm ET
In his televised response to President Obama's State of the Union address, House Budget Committee Chairman Paul Ryan (R-WI) repeated a series of debunked Republican talking points and attacks on Democratic policies. Among other things, Ryan absurdly claimed that the Recovery Act "failed" to create jobs, overstated Obama's role in creating the current debt, and stubbornly insisted that the Affordable Care Act will increase the deficit, even though nonpartisan experts say that he's wrong

January 26 2011 at 5:26 PM Report abuse +2 rate up rate down Reply