Yesterday, Kansas City Federal Reserve President Thomas Hoenig gave a speech (.pdf) reiterating his believe that the central bank shouldn't assure the market that interest rates will be kept low for an "extended period." According to CNBC and others, investors were not pleased with his comments. Yet, it's unclear why they were so concerned -- Hoeing didn't say anything shocking or new, and he's the only one passionately making this argument on the Fed's Open Market Committee (FOMC).
Here's the strongest language in Hoenig's speech:
Under this policy course, the FOMC would initiate sometime soon the process of raising the federal funds rate target towards 1 percent. I would view a move to 1 percent as simply a continuation of our strategy to remove measures that were originally implemented in response to the intensification of the financial crisis that erupted in the fall of 2008. In addition, a federal funds rate of 1 percent would still represent highly accommodative policy.
No News Here
First, Hoenig's stance is not news. Indeed, the market has been reacting to his view that the Fed might need to raise rates sooner than later since January. At that month's FOMC meeting he began dissenting with the rest of the committee about the using the phrase "for an extended period" to describe how long rates would be held near zero. Yesterday's speech didn't present any unexpected view: he just provided a little additional detail. Hoeing's opinion should already have been priced into the market since January.
A Lone Voice
In March, he made the same argument. But as in January, he was the sole dissenter. That shows that he must not be convincing anyone on the FOMC that rates might need to be raised soon. If nine voters believe something and one voter believes something different, there's probably not a whole lot to worry about. Even though some members could be sympathetic to Hoenig's view, none are so agreeable that they joined him to dissent in March. Unless others start making similar speeches or begin dissenting with the majority, then there's little to worry about.
And those other FOMC members aren't likely to be convinced by Hoenig's desire to raise rates soon either. They are still cautious about the economy and won't likely want to raise rates until unemployment begins to see a more substantial decline. Remember, full employment is an also explicit policy goal of the Fed, along with price level. And with core prices slightly deflationary, inflation is not likely a greater concern for most members than 17% underemployment.