With the meeting of the FOMC starting today, there seems to be a great deal of uncertainty about what the Fed statement will say. I’m pretty certain that there will be no change in the target rate (with the “extended period” statement remaining), the comments about the economy will be dour (but not likely strong enough to drive the market dramatically downward), and they will reiterate that they are prepared to take whatever measures are necessary as conditions warrant. The real question for me is whether Kansas City Fed Chief Thomas Hoenig will continue to dissent. For the last year or more of Fed statements, Hoenig has insisted that the Fed should be raising the target rate in order stave off inflation or the creation of another housing bubble. The facts, though, continue to point away from his fears. In fact, many are now suggesting that there is a greater risk of deflation than inflation in the near term.
I would like to see him drop his dissent. Bernanke runs a more democratic Fed and is willing to support the differences of opinion, but a dissent now will only add to the uncertainty. Investors, not just fed-watchers, are looking for something definitive out of the FOMC. They’re not likely to get it, but a dissent now, at this inflection point, would leave them questioning the statement in its entirety. It’s not a matter of differences of opinion on how to chart the course of recovery; the concern now is slipping backwards. Saying that we need to raise rates in the face of the current economic conditions isn’t going to add any much-needed stability.