Federal Open Market Committee members are stepping out of line with Chairman Alan Greenspan on future rate hikes and are disagreeing with his bullish forecast for economic growth. The split has been gaining prominence among fixed-income industry watchers, who see it as unusual since Greenspan is known as a consensus builder.
John Herrmann, director of economic commentary at Cantor Viewpoint, said the dissent is getting louder and is led by Ben Bernanke, voting member of the FOMC and a Fed governor. "We're hearing rumblings from Fed officials, namely Bernanke," Herrmann said. "The futures market suggests a pause in December and Bernanke is in tune with futures pricing action." The futures market has recently lowered prospects for a 2.5% Fed Funds rate next March from 92% to 11%--and this was even before September's employment report, which showed less-than-expected job growth, according to Cantor research. Bernanke did not return calls for comment.
Other influential FOMC voting members such as Federal Reserve of St. Louis President William Poole and Federal Reserve Bank of Cleveland President Sandra Pianalto have also recently made public comments that seem to run counter to Greenspan's upbeat view of the economy. The main issue is whether the FOMC's use of the term "measured" to describe the pace of future rate hikes will continue to be used. The continued use of the word is seen as a sign the economy is rolling along and the Fed will continue to raise rates. But because Greenspan is known for being a consensus builder, he may remove "measured" from the FOMC's next statement, Herrmann said. Poole and Pianalto did not return calls by press time.
Of course, it is largely a matter of interpretation. But some Fed watchers said recent comments made by Bernanke, Poole and Pianalto send conflicting messages. For example, Poole hinted in an Oct. 6 speech that low rates may be maintained. "It is possible--I would argue likely at some point--that new information will cause the FOMC to adjust the target at a pace different from what is currently anticipated," he said.
And Pianalto said in a speech the next day she is worried about job growth and argued "the process of job expansion will take more time to gain momentum," even though the U.S. economy "appears to be growing at a sustainable pace."
"You have different governors giving honest but widely differing comments," said Mike Alfstad, president of RW Smith Fixed Income, a broker/dealer that specializes in fixed income. "It produces more volatility than the market appreciates."
