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Meltzer, O’Sullivan Say Dissents Highlight Divisions on FOMC

Aug. 9 (Bloomberg) -- Fed historian Allan Meltzer, a professor at Carnegie Mellon University, and James O’Sullivan, chief economist for MF Global Inc. in New York, said dissents by three Federal Reserve policy makers at today’s meeting in Washington highlight divisions among policy makers. They spoke after the majority on the Federal Open Market Committee voted to keep the benchmark interest rate at a record low at least through mid-2013.

Christina Romer, former chairman of the White House Council of Economic Advisers who teaches at the University of California, Berkeley; Jason Schenker, president of Prestige Economics LLC; Paul Ballew, chief economist at Nationwide Mutual Insurance Co.; and Jerry Webman, chief economist at OppenheimerFunds Inc., also commented.


“The Fed can’t do much because it’s already done too much. It’s pretty much impotent.”

“We have one and a half trillion in idle reserves in the banking system, and interest rates are the lowest levels ever. QE2 was a foolish move and adds to the inflationary pressures we’re going to see after time,” he said, referring to the second round of so-called quantitative easing.

“Three dissents tell the market that there isn’t agreement and it’s going to be more difficult for the Fed to do anything. The Fed likes to operate as much as it can on a consensus.”


“To have three dissents highlights the real divisions on the Fed right now.”

The decision to keep rates low at least through mid-2013 is “a dramatic commitment on the funds rate that’s clearly extremely dovish and shows clear bias toward more potential purchases.”


“I find the statement about as aggressive as the Fed could have been in this situation: Certainly, more aggressive than I was anticipating.”

“What they said about the deterioration in the outlook was pretty extreme.”

Fed Chairman Bernanke Ben S. Bernanke “has seemed a little afraid of dissent in the past and the fact that he and others are willing to have such an open fight says there is a group that is willing to fight.”

She said there may be more challenges in the future, given “they’re willing to tolerate that many dissents.”


“The statement indicates there was a very hot debate over what policy tools to use, and they opted for one of the only things they have. While the 2013 commitment sounds good, it doesn’t assuage current market fears, and rising concerns of a return to recession.”

“This is not a good statement. Fiscal policy is completely tapped out. If we need accommodative policy, the only game in town is the Fed.”


“Ultimately, the big issue for the U.S. and global economy is, ‘What else are we asking the Fed to do?’ ”

“We have structural problems in the economy that are somewhat out of the Fed’s control.”

“The statement did what it needed to do today, which is send the message to markets that policy will remain accommodative for a long period of time, and inject a degree of calm into the market.

‘‘Monetary policy is going to remain in an extraordinarily accommodative position for five-plus years, starting in 2008, and it’s unbelievable when you think about it. The severity and complexity of this downturn has put us in a position we never thought we would see. We’re looking at an exit strategy not being implemented over the next couple of years. This recovery is so tepid and encumbered by so many structural problems, the Fed could stay on the sidelines beyond 2013.”


“The Fed is in a predicament. That is, they’re in a situation where they don’t want to claim to be taking an action that’s not going to have a clear impact on the economy or financial markets. Right now, it’s doubtful there’s anything the Fed could do in one shot -- today, tomorrow, or in the next couple of months -- that could have an enormous impact on the economy.”

“By not taking further action and telling us the economic situation is worse than they thought, they’re essentially saying that there’s not a monetary policy initiative they can take right now that would address the weakness.”

As for keeping rates low at least through mid-2013, “I’m surprised they didn’t hedge it. They were bending the yield curve in a very certain way. It’s very difficult to tell if that’s a good idea. The immediate response is positive. Longer-term, does easy money for a long period of time necessarily help the economy? That remains to be seen.”

To contact the reporter on this story: Vivien Lou Chen in San Francisco at

To contact the editor responsible for this story: Christopher Wellisz at

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