The key phrases in today’s FOMC statement from the Fed in reference to the outlook for interest rates: “exceptionally low” and “extended period.” Almost no one expected a change from the current zero-to-0.25% Fed funds target, although there was speculation that the wording might change. Not so. Bernanke and his crew want it understood that they’re going to keep rates low for quite a while, and they really do mean it.
The vote in favor of maintaining the status quo for the target Fed funds rate was nearly unanimous. There was one dissenting vote from Kansas City Fed president Thomas Hoenig. Although he voted against the FOMC’s let ‘er ride policy, the FOMC statement vaguely suggested that the dissent was over wording rather than the actual target rate. Maybe, maybe not. Here’s how the Fed release explained the matter: Hoenig “believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.”
Does this mean that dissent on the FOMC has been reduced to debating rhetoric vs. rates? Maybe. In any case, it’s a moot point. Rates continue to hover just above zilch in the U.S. and look set to stay there for, well, an extended period.
Is that warranted? Hoenig seems to have his doubts. So does Joseph Carson, chief economist at AllianceBernstein, who says the Fed’s internal forecast anticipates 4% GDP growth this year and in 2011. “That growth expectation eventually has to follow through to their rate policy,” Carson tells CNNMoney.com. “Hoenig’s arguments are well founded; staying at a 0% funds rate while the economy is starting to grow will eventually lead to imbalances.”
Perhaps, although it’s not top-line GDP growth that’s the problem so much as it is the ongoing weakness in the labor market. That doesn’t give the central bank a pass, of course. Unusually low rates left to roll on for an “extended period” may cause trouble down the road, even if job creation remains weak. In fact, we’d be surprised to find that the cheap money doesn’t come back to haunt the economy at some point. That doesn’t make raising rates any easier given the labor market; nor does it ease the anxiety about keeping the price of money at near zero. But it does remind that there are no easy decisions at the moment in the golden age of easy money.