Jan. 28 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan will have little trouble finding a consensus in the Federal Open Market Committee today to hold interest rates at a 45-year-low of 1 percent. At the same time, he will get little agreement on when rates should begin to rise. Today is the first meeting for a new lineup of Fed bank presidents who join the seven Fed governors in voting on monetary policy. Kansas City's Thomas Hoenig, a new voter, urges that when job growth accelerates, interest rates should rise to forestall inflation. Fed Governors Ben S. Bernanke and Edward Gramlich are among those who argue rates should stay low until prices actually start to rise.
``There's some disagreement at the Fed,'' said Dean Maki, a former Fed staff economist who holds a similar position at J.P. Morgan Chase & Co. in New York. ``No one on the committee is pushing for higher rates now, but if jobs come through as we expect, with increases of 150,000 to 200,000 a month, the debate becomes much more interesting.'' The FOMC cut its benchmark overnight bank lending rate by a quarter-point in June and since August has promised to keep the rate low for ``a considerable period'' to keep inflation from falling much below 1 percent. With the economy set to expand this year at the fastest pace in almost two decades, the Fed's regional bank presidents have started to discuss when the period of ``accommodative'' monetary policy should end. None of the 86 economists surveyed by Bloomberg News forecast an increase in the target, known as the federal funds rate, at today's meeting.
New Voters
Eleven of the 12 regional Fed bank presidents take turns, four at a time, in voting on rate policy. The president of the New York Fed always votes, as do the seven Fed governors. Joining Hoenig in this year's rotation onto the panel are William Poole of St. Louis, Cathy Minehan of Boston and Sandra Pianalto of Cleveland. While Minehan is a centrist who has never dissented from a Fed decision, Poole is one of the Fed's toughest inflation fighters, according to Maki. Pianalto has never voted before, making her views difficult to gauge, he said. Timothy Geithner, who is a permanent voter as president of the New York Fed is also new to the committee and hasn't spoken publicly about the economy since joining the central bank.
Aside from Hoenig, Bernanke and Gramlich, most of this year's voting FOMC members haven't said which signal they are watching for when to raise rates. At stake in the jobs versus inflation debate is whether rates will rise within months, or not for a year or more. Unemployment may drop in the second half of this year, based on the median forecast of 55 economists surveyed Dec. 23 to Jan. 6 by Bloomberg News.
This Year or Next?
Prices won't accelerate at least through the fourth quarter, the same survey found, as the dollar's 30 percent drop against the euro in the past two years holds down import costs and unused capacity keeps producers from charging more for goods and services. Private economists are split on when the Fed will tighten monetary policy. Joseph LaVorgna at Deutsche Bank Securities Inc. and Henry Willmore at Barclay's Capital Inc. are among those who see rates rising as soon as June, according to a Bloomberg News poll conducted last week. Other economists, including Joseph Abate at Lehman Brothers, William Dudley at Goldman, Sachs & Co. and David Rosenberg at Merrill Lynch & Co. predict the Fed won't raise rates until 2005. The differences over timing reflect a debate over the changing nature of inflation. Price increases have been slowing across the industrialized world for two decades. Japan has struggled with deflation, a sustained decline in prices overall, for five years.
Waiting for Jobs
The U.S. consumer price index, excluding food and energy, rose just 1.1 percent last year, the smallest gain since 1960. In May the Fed said it was worried inflation would fall too low for the first time since the Great Depression. In past economic recoveries, the Fed began to raise rates when job growth increased and unemployment fell significantly. Policy makers sought to keep inflation from accelerating as the economic slack caused by recession abated. ``When the party gets going too good, the Fed's supposed to take the punchbowl away,'' said Harvard University Professor Ken Rogoff, former chief economist at the International Monetary Fund. ``They're at the cusp of having to think about it.'' Kansas City Fed President Hoenig, one of the new voters, suggested in a speech earlier this month that the central bank should stick with the job-growth standard for when to tighten. ``Once the economy achieves sustainable growth with sustained increases in employment and with upward price pressures, a less accommodative policy would become appropriate,'' Hoenig said in a Jan. 8 speech in Topeka, Kansas. While he said that isn't ``an immediate issue,'' he predicted job growth will reach 100,000 to 300,000 positions a month in the first half of this year.
Monitoring Inflation
Hoenig's position represents a school of thought within the Fed, based on comments by Federal Reserve Bank of Philadelphia President Anthony Santomero, who doesn't vote this year. Nonvoting regional Fed presidents still participate in FOMC deliberations. Rates should rise when the economy is on a ``trajectory to achieve full employment or potential output, but before inflation actually accelerates,'' Santomero said in a Jan. 15 speech to in Cherry Hill, New Jersey. Other central bankers argue the rules have changed. The lowest inflation in more than 40 years together with the threat of deflation mean the Fed shouldn't risk raising rates until it actually sees prices climb, according to this school of thought. ``Inflation is not simply low; for my taste, it is very nearly at the bottom of the acceptable range for measured inflation,'' said Fed Governor Bernanke, a permanent voter, at a Jan. 4 economics conference in San Diego. ``Because inflation is so low, monetary policy can afford to be more patient to ensure that the recovery is self-sustaining.''
What Does Greenspan Think?
``I'm in no hurry to be pre-emptive; I'm willing to wait'' before raising rates, Dallas Fed President Robert McTeer said at a Jan. 15 speech in Calhoun, Georgia. Acting to pre-empt inflation would have shortened the decade-long economic expansion that ended in March 2001, said McTeer, who isn't an FOMC voter this year. Fed Governor and permanent voter Gramlich said in November that productivity gains mean ``there probably isn't that much confidence'' in the Fed's ability to estimate how low unemployment can fall without sparking inflation. ``When prices start rising, that's how full employment reveals itself,'' Gramlich said.
The most important voice belongs to Greenspan, who determines the Fed's course when the committee is divided, according to participants on both sides of the debate. Greenspan hasn't expressed his positions on the timing of rate increases or the economic signposts he would heed. Goldman Sachs' Dudley said Greenspan's views came through in the minutes of the FOMC's October meeting. ``The prospects for persisting slack in labor and other resources in combination with substantial further increases in productivity were likely to hold inflation to very low levels over the next year or two,'' said the minutes, released in December. //www.bloomberg.com