Hoenig Dissents 4th Time As FOMC Votes To Keep .25% Overnight Rates. Record Low Mortgages Hold.
The Federal Open Market Committee voted today to keep the overnight bank-to-bank Fed Funds Rate steady at 0-0.25% and the overnight Fed-to-bank discount rate at .75%, citing subdued inflation that’s likely to continue for “some time.” For the fourth straight meeting in 2010, Kansas City Fed President Thomas Hoenig dissented on the belief that modest rate hikes now could avoid having to sharply increase rates later. There was no explicit mention of how they’ll handle their $1.25t of mortgage bonds purchased from January 2009 to March 2010, but the minutes from this meeting (that will be released in a few weeks) will likely reveal that they won’t sell mortgage bonds until after some overnight rate hikes.
Selling mortgage bonds has a much more direct upward impact on mortgage rates whereas the overnight rate hikes would indirectly influence mortgage rates. So the minutes from this meeting will most likely reveal that they will hike overnight rates first (when they determine inflation is a potential issue), then sell mortgage bonds as the economic recovery demonstrates it’s self-sustaining. Until then we can expect more mortgage rate volatility as markets trade on every little sign that we may (or may not) be moving out of a low inflation (or deflationary) era, and we can expect that volatility to continue despite Fed decisions. More below on debate about whether Bernanke’s Fed is leaving rates too low for too long.
Greenspan took lots of heat for leaving rates too low for too long. Bernanke is perhaps better justified since this financial crisis and resulting global economic instability is much deeper than anything Greenspan faced. But we’ve also increased the money supply drastically to combat the crisis, so if the economy does show continued signs of improvement, inflation can spike quickly. Fed rate hikes and mortgage bond selloffs would follow, both causing mortgage and all other rates to spike. We covered this topic in detail a few days ago.
FULL FED STATEMENT
Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.
Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who 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 a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.