Sometimes, when you look at a decision, the most interesting part of the debate isn’t where people agree it’s where they disagree. That’s often the case with legal discussions. When the Supreme Court decides a case, they usually publish two opinions: a majority opinion that explains the ruling, and a dissenting opinion that points out holes in the majority’s argument.
Dissenting opinions often contain a key to understanding where the future will lead. In his insightful dissent in the 19th-century school segregation case Plessy v. Ferguson, Associate Justice Harlan noted that legal segregation between the races would impose a badge of servitude on African Americans and violated the 13th Amendment. 60 years of civil-rights struggles followed.
In the Fed’s decision last week the President of the Minneapolis Fed dissented. The Fed reported that it was because he didn’t like the wording of the official statement—an unusual reason to disagree. But the Fed is unique. It’s not a single government committee, but an aggregation of several constituencies, including regional leaders. President Kocherlakota explained his dissenting vote on the Minneapolis Fed’s website.
In his note he makes it clear that the Fed is concerned about the falling inflation rate. PCE inflation is currently running around 1%–the core is even lower than that. If deflationary expectations take hold, this would have a deeply corrosive effect on the economy. Japan’s 25-year struggle with deflation shows just how poisonous it is. And the Fed is aware of the issue. Kocherlakota wanted the market to understand that interest rates will be extremely low as long as inflation remains below its 2% target.
So as markets embark on what seems like another “taper-tantrum,” keep in mind: sometimes dissent is decisive. Until inflation increases, don’t expect interest rates to move.
Douglas R. Tengdin, CFA
Chief Investment Officer