US Federal Reserve governor Frederic Mishkin’s departure alters the Fed balance of power. He was a noted “soft money” man and supporter of chairman Ben Bernanke.
Minutes of the Federal Open Market Committee’s (FOMC) 30 April meeting disclosed a revision in the Fed’s 2008 PCE (personal consumption expenditures) inflation forecast from the 2.1-2.4% forecast in January to 3.1-3.4%. Could these be the first signals of a policy reversal and a rate rise?
Mishkin, appointed in September 2006, had taken a two-year leave of absence from Columbia University; so, his decision to leave is not entirely surprising. Nevertheless, his policy position was sufficiently individual, so his departure is significant.
Mishkin was a strong proponent of cheaper money; in particular the recent rate reductions to fight the subprime mortgage crisis.
Mishkin claimed it was impossible for the Fed to deflate asset bubbles, rebutting a key position of hard money enthusiasts.
If inflation will be above 3%, then a 2% funds rate cannot be sustained for long without pushing inflation up further.
At a minimum, Mishkin’s departure removes a barrier to a policy reversal on rates. It may even indicate that internal Fed discussions relating to such a reversal are under way.
One swallow does not make a summer; similarly one governor’s departure doesn’t herald a policy change. Yet, combined with the new interest rate forecast, it suggests that the FOMC meetings on 25 June and 5 August will be worth watching.