Bickering And Skepticism Among Federal Reserve Officials Weaken Their Odds of Success

Aside from the unsound and questionable economic and monetary policies pursued by the US Federal Reserve, another reason to bet against the success of the US Federal Reserve's policy measures seems to be an irony-Federal Reserve officials themselves have been doubting on their efficacy or have been quibbling about it.

This from David Wessel of Wall Street Journal Economic blog...

``The Federal Reserve has been fighting the persistent global credit crisis with a proliferation of lending programs that producing acronyms even faster than the Pentagon can. “I think the facilities have worked quite well,” the new president of the Federal Reserve Bank of New York, Bill Dudley, said in a speech over the weekend. “But the facilities haven’t been a panacea for three reasons.”

His three: (italics mine)

• (1) Fed lending can’t solve “the fundamental problem — the shortage of capital in the banking system.” He added that “until the banking system is viewed as being sufficiently well-capitalized and is able to expand its lending activity significantly” the economy will suffer.
• (2) Legal limits require the Fed to lend only when the would-be borrower offers sufficient collateral; it can’t lend unsecured or provide guarantees. (The Treasury can, however.)
• (3) Initiatives such as TALF (Term Asset-Backed Securities Loan Facility) are off to a slow start because of “the reluctance of investors to participate” in part because of “worries about what participation might lead to” given the political environment. Dudley pronounced these worries “misplaced.”

Not enough, recently Paul Volker, the former US Federal Reserve chairman, had a public debate with the incumbent officials led by Donald Kohn, the vice chairman.

Again from Brian Blackstone of the Wall Street Journal economics blog...

``Former Fed Chairman Volcker, who along with Kohn was at a conference honoring former Fed governor Dewey Daane, questioned how the Fed can talk about both 2% inflation and price stability.

``“I don’t get it,” Volcker said, leading to a lively back and forth between the two central-bank heavyweights.

``By setting 2% as an inflation objective, the Fed is “telling people in a generation they’re going to be losing half their purchasing power,” Volcker said. And if 2% is the best inflation rate, and the economic recovery lags, does that mean that 3% becomes the ideal rate, he asked....

If it’s any consolation for Kohn, he wasn’t the only one on the business end of Volcker’s barbs. Volcker told New York Fed President William Dudley, who also spoke at the conference, that he doesn’t understand what the Fed’s trying to accomplish by paying interest on excess reserves.

“Now I’m more confused,” Volcker said after Dudley addressed the topic in his speech.