Divided Fed is 'dysfunctional'

By Annalyn Censky, staff reporter


DENVER (CNNMoney.com) -- Financial markets are banking on another bond-buying spree by the Federal Reserve, but the central bank's policymakers aren't presenting a unified front on the controversial idea. The lack of a clear message could be one factor holding back the recovery, said several economists.

The Fed's policy making team is "dysfunctional," said Laurence Meyer, a former Fed governor, speaking Sunday in Denver at the conference for the National Association of Business Economics.

John Taylor, a Stanford University economist who spoke with Meyer, blamed the central bank for adding more uncertainty to the economy.

After the Fed's meeting in August, Meyer said, committee members emerged with different takes on the decision for a modest increase in U.S. Treasury purchases.

"You've got half of them saying they didn't do anything, and half coming out saying they did something fundamental," Meyer said. "You can disagree inside, but you should never step out of the room, and have a different view."

Even though only one member, Kansas City Fed president Thomas Hoenig, has formally voted against the committee's latest actions, several have recently come out either directly or subtly against making more Treasury purchases, a policy known as quantitative easing.

Since September 2008, the Fed has pumped some $2 trillion into the economy through asset purchases, meant to spur economic activity by lowering interest rates. It's not a risk-free strategy.

James Bullard, the president of the Federal Reserve Bank of St. Louis, said on CNBC Friday that expanding the policy is a "tough call," and noted the Fed could risk reigniting inflation by overdoing it.

In recent public speeches, Charles Plosser of the Philadelphia Fed and Richard Fisher of the Dallas Fed have also clearly spoken out against the policy. Narayana Kocherlakota of the Minneapolis Fed has said another round of Treasury purchases would have a "muted impact" at best.

While those three don't currently have votes on Fed policy, they will next year, based on the committee voting rotation.

In the meantime, economists expect nearly all of the current voting members to side with Fed chairman Ben Bernanke at the next November meeting.

At its most recent meeting in September, the Fed used more aggressive language to signal further action, saying it was prepared to "provide additional accommodation."

The one member who will likely back up his dissenting voice with a formal vote, remains Hoenig, who has consistently voted against additional asset purchases and low interest rates.

"There are ways to respectfully dissent, and Tom embraces debate and does it in a formal way," said Diane Swonk, chief economist with Mesirow Financial.

But Swonk agreed with the idea that other means of dissent can be counterproductive, adding to the uncertainty in the economy that's holding both businesses and consumers back from spending.

"It's hard for financial market participants to see conflicting views," Swonk said. "It's like going to war and not having all your generals decided."

Despite the disagreements among Fed insiders, Wall Street seems to be counting on quantitative easing as a given outcome for the next Fed meeting in November.

On Friday, a worse-than-expected jobs report -- which would usually be seen as a bad sign -- sent the Dow above 11,000 because the downbeat news seemed to boost the chances of the Fed stepping in to save the day. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play

Search for Jobs

Index Last Change % Change
Dow 17,712.66 34.43 0.19%
Nasdaq 4,891.22 27.86 0.57%
S&P 500 2,061.02 4.87 0.24%
Treasuries 1.95 -0.06 -2.94%
Data as of 5:52am ET
Company Price Change % Change
Intel Corp 32.00 1.92 6.38%
Bank of America Corp... 15.31 -0.11 -0.71%
Ford Motor Co 15.98 -0.03 -0.19%
Apple Inc 123.25 -0.99 -0.80%
Microsoft Corp 40.97 -0.24 -0.58%
Data as of Mar 27
Sponsors

Sections

#AskSeaWorld campaign aims to set the record straight on the company's animal care, but is fueling critics on Twitter. More

America's job market is surging ahead, but consumers and businesses still aren't spending much. More

Apple CEO Tim Cook has spoken out against anti-LGBT legislation in the U.S., saying the new laws are "very dangerous" and contrary to America's founding principles. More