3 Wood: Federal Fissures

Frank Sinatra & Groucho Marx
"It's Only Money" ~ 1951

Fissures are starting to show at the Fed:

Fault lines emerge at Fed ~ Bernanke, Philadelphia Fed's Plosser differ publicly on new policy

"WASHINGTON (MarketWatch) - Key fault lines are emerging at the Federal Reserve over the central bank's journey into uncharted monetary policy.

In a speech on Tuesday, Philadelphia Fed Bank president Charles Plosser publicly took issue with positions advocated by Fed chief Ben Bernanke.

Plosser urged the Fed to "proceed with caution" with the new policy.

On Monday, Bernanke signaled that it was full speed ahead - with existing programs needing additional resources and new ones in the works to stabilize the financial system.

"It is a huge disagreement," said Robert Brusca, chief economist at FAO Economics."

For those unfamiliar with how this works, you never, ever disagree with your boss in public if your boss happens to be the Federal Reserve Board Chairman.

Did I say never?

You can disagree in private, go into a closed room with the Fed Chairman and disagree, yell, rant, whatever. But when you are done and you go out into the public, you dang well better be singing off the same sheet of music. Otherwise, you are signaling very bad things to the monetary markets.

And we don't need to go making any more bad things to go happen in the monetary markets than we already have, do we?

So what are they disagreeing about? This:

"Underneath the surface is a real concern about how and when the Fed tries to exit from its new monetary policy.

Fed officials who pay attention to the money supply believe that the Fed's current policy of printing money never ends well and the danger of inflation is very high. They believe the Fed must withdraw the stimulus before there is any sign of inflation or it is too late.

Bernanke wants the flexibility to take his time.

William Poole, who recently left his post as president of the St. Louis Fed, says it is crucial that the Fed set a target for cutting its balance sheet.Poole said the expansion of the Fed's balance sheet is unprecedented and research suggests that a surge of inflation is sure to follow.

"I would say if the policy is not reversed, there is a high probability that the unpleasant risk (of inflation) materializes," Poole said in an interview."

That is a lot of "Fed-speak" to digest.

Translation: When the economy turns around, and it will, how fast should the Fed's clamp down the money supply and ratchet up the interest rates to try to constrain inflation? Plosser wants it to happen real quick. Bernanke wants to take his time and make sure the economy is growing well before he clamps down.

Remember, part of the reason we are in this situation is Greenspan and the Bernanke increased the discount rate for 17 consecutive quarters. I was hollering after the first 8 quarters that they needed to slow down and back off the increases, cause I could see what they were doing to the adjustable rate loan market. I suspect that Bernake learned his lesson from that experience and realizes that the rate increases have to be phased in over a sustained period of time.

What that means is we will trade some inflation for economic growth.

Keep an eye on the Fed for more signs of discord in the future. Plosser may need to think about clearing out his desk if he can't keep his yap shut.

~ 3 Wood