Infighting At The Fed

Bloomberg is reporting Mishkin to Leave Fed in August, Return to Columbia.

Federal Reserve Governor Frederic Mishkin, a central-banking scholar and advocate of the longest run of interest-rate cuts since 2001, resigned to return to Columbia University.

Mishkin, 57, on a leave of absence from the New York school, will step down as of Aug. 31, the Fed said in a statement today, also releasing his letter of resignation to President George W. Bush. Mishkin will attend his final meeting of the rate-setting Federal Open Market Committee on Aug. 5.

The departure may create an unprecedented third vacancy on the seven-member Fed Board of Governors this year as the central bank tries to ease the credit crisis. The vacancies mean that a new U.S. president to be inaugurated in January may have an opportunity to influence monetary and regulatory policy by nominating new members to the board.

"It leaves the board in a challenging condition, with only four governors, one of which is unconfirmed," said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington and a former Fed research manager.

Bush may select a fourth nominee to fill Mishkin's seat. Should the Senate fail to approve a replacement or not allow Bush to appoint a temporary substitute, the Fed would have fewer than five governors in office for the first time since establishment of the bank's current structure in 1936.

Mishkin presented a paper at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming, saying the Fed can be more successful by lowering rates "aggressively" in response to a deep slump in home prices. In another speech he said the financial turmoil posed an "important downside risk to economic activity" beyond housing.

"He was a pretty important supporter of the move toward aggressive rate-cutting this year," said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who used to work at the Fed.

Bies Frustrated Over Slow Progress On Capital Standards

Susan Schmidt Bies resigned effective March 30 2007. The interesting thing about Bies' resignation was that she was spearheading efforts to revise capital standards for banks but was frustrated by the slow progress. Here is an interesting flashback snip:

After a speech at the National Credit Union Administration's Risk Mitigation Summit in January, Bies told reporters that "I'm an impatient person. I clearly wish that things were going faster, but I'm very happy that we've got everything out for comment now."

On Wednesday, four major U.S. banks submitted a letter to the Federal Reserve and urged it to move away from certain Basel II proposals. JPMorgan Chase (JPM), Washington Mutual (WM), Wachovia (WB), and Citigroup (C) complained that the new rules would require U.S. banks to hold more minimum capital and would give foreign banks an advantage.

Ironically, three of the four banks complaining loudest about forthcoming capital requirements are in deep trouble being over leveraged and short of capital. Bies had it right.

Poole Retired In March, Critical Of Fed Ever Since

St. Louis Fed Governor William Poole retired in March and has been critical of Bernanke ever since. Please consider this May 2nd article Fed 'Rogue Operation' Spurs Further Bailout Calls

"It is appalling where we are right now," former St. Louis Fed President William Poole, who retired in March, said in an interview. The Fed has introduced "a backstop for the entire financial system."

Fisher Warns Of Rate Hikes

Fed Governor Fisher is warning Rate hikes could come sooner vs later.

The Federal Reserve would likely increase interest rates "sooner rather than later" if inflation worsens, even if the U.S. economy remains weak, Dallas Federal Reserve Bank President Richard Fisher said on Wednesday.

"If inflationary developments and, more important, inflation expectations, continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario," Fisher said.

Fisher is one of the Fed's leading policy hawks, urging the central bank to focus more on the need to quell inflation, which he termed "a sinister beast." He has tallied three straight dissents against the Federal Open Market Committee's moves to lower benchmark lending rates.

"Growth cannot be sustained if markets are undermined by inflation," Fisher said. "Stable prices go hand in hand with achieving sustainable economic growth."

Who's Left On The Board?

• Ben Bernanke - Chairman
• Donald Kohn - Vice Chairman
• Kevin Warsh
• Randall Kroszner

Click here for more about the Fed Board of Governors.

Look Back At Mishkin

The Wall Street Journal has this Look Back At Mishkin.

Mr. Mishkin has been an important intellectual force at the Fed in his two years there, making several academically meaty speeches on issues such as how to deal with asset prices and cushion the economy from the housing market’s blow. That said, he isn’t considered one of the key architects of the Fed’s response to the credit crisis in the last year, and his speeches sometimes haven’t represented where Chairman Ben Bernanke’s own inclinations were.

Recently, Mr. Mishkin was on the frontline of a debate over whether the Fed should work to prevent asset-price bubble. In a speech this month, he maintained the common central bank view against attempting to prick asset-price bubbles through monetary policy. His key reasons: bubbles can be hard to identify; using interest rates may not even restrain a bubble; and monetary policy, as a blunt instrument, would likely hit overall asset prices rather than those just in the bubble. That stance echoed comments he made last September as the credit crisis began coming to a head.

Earlier this year, he defended the Fed’s actions to stem the crisis. In a speech in January, he focused on the risks that financial market disruptions pose to the economy. He stressed the importance of responding preemptively with “decisive action” as a form of risk management, echoing comments from Mr. Bernanke.

He has been somewhat dovish on inflation, in March indicating an expectation for easing price pressures. He also played down the effects of dollar depreciation on inflation. However, he’s been a vocal proponent of a specific inflation target for the central bank.

Good Riddance

One look at that pathetic profile is enough to cheer Mishkin leaving. Inflation targeting is complete nonsense, and ironically Mishkin does not even practice what he preaches or he would be begging for interest rate hikes, not cuts.

Ignoring asset bubbles but proposing the Fed acting to prop up the markets when they bust causes serially bubble blowing. The latest example is the housing bubble brought about by a Fed acting in the wake of a dotcom bust.

What's interesting however is we are seeing frequent public displays of infighting and dissent, something that seldom if ever happened under Greenspan. Now if only Bernanke would resign.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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