By Phillip L. Zweig at Bondsquawk.com

When the Federal Open Market Committee (FOMC) meets (today), self-described “inflation hawk” Dr. William F. Ford, Weatherford chair of finance professor at Middle Tennessee State University and a former president of the Federal Reserve Bank of Atlanta,  isn’t expecting any uptick in the benchmark federal funds rate from the current 0.25% level. In fact, he is resigned to the likelihood that the Federal Reserve Board will keep rates artificially low for the foreseeable future.

And that, he says, would be a terrible mistake.  According to Ford, the recession is over, and the Fed’s top priority now should be making sure inflation doesn’t rear its ugly head. “We now have negative real interest rates on a persistent basis, which is “never a good idea,” he says. “It’s not a sustainable policy.” He argues that the central bank is apparently basing its interest rate policy on inflation indices that don’t reflect rising energy and food costs, ignoring the fact that “everybody heats or cools their home and eats.” There’s a real danger, he says, that “the Fed will wait too long to back out of its low interest rate policies. They’ve boxed themselves in and created a danger that they’ll wait too long before mopping up more than a trillion dollars of excess liquidity on the Fed’s balance sheet.” This excess liquidity, he warns, is like “gas in a ditch waiting for someone to drop a match.”

Ford contends that it would take only a small hike in the fed funds rate—a mere 0.25%—to dampen inflationary expectations. While he doesn’t look for a change now, he thinks that chairman Ben Bernanke will feel the pressure to  “get off the dime” in a few months, when, he predicts, the National Bureau of Economic Research will declare that the recession actually ended last summer, about 18-20 months after it began. The NBER is considered the official arbiter of economic cycles.

Failure to head off inflation sooner rather than later, he cautions, may cause a sharp rise in the yield curve, which would dramatically increase the cost of servicing the national debt, now approximately $12.6 trillion. Based on President Obama’s budget forecasts, it’s heading for $14 trillion plus, Ford points out.  “Raising the fed funds rate by one quarter percent won’t do anything negative,” he says. “And it could have positive effects that would put a lot of people at ease.”

Given Ford’s views on monetary policy, it’s not surprising that he isn’t thrilled over the Obama Administration’s apparent selection of Dr. Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, to serve as vice chairman of the Board of Governors.  Late last week, the White House announced that Dr. Yellen, along with Peter A. Diamond, an economics professor at the Massachusetts Institute of Technology,  and Sarah Bloom Raskin, Maryland’s commissioner of financial regulation, were the leading candidates to fill three open board seats. Calling Dr. Yellen “an ardent easy money advocate,” he says he would prefer another Bay Area economist, Stanford Professor and Hoover Institution senior fellow John Taylor. A former Treasury under secretary in George W. Bush administration, Taylor is the formulator of the so-called “Taylor Rule,” which, in simple terms, calls for higher rates to curb inflation when inflation exceeds target levels, or when its output surpasses full-employment levels, and to cut rates when the reverse occurs. “John Taylor is brilliant,” says Ford. Another good choice for vice chairman, he says, would be Thomas Hoenig, president of the Kansas City Fed, who has also criticized the Fed for not moving aggressively to deter inflation.

Inflation is the one wild card in Ford’s otherwise optimistic economic outlook. “If inflation doesn’t bite us,” he says, he projects a “pretty good rebound, a V-shaped recovery. The trend in GDP growth is strong.” Still, he agrees with the consensus view that unemployment will likely remain in the 9% area through year-end 2010, possibly declining to 8% by the end of 2011, and below 7% in two to three years. The likelihood of a “double dip” recession, he figures, is about “10% or less.”

As for other shoes to drop in the financial crisis, Ford confident that the European financial authorities will make sure Greece doesn’t jeopardize economic recovery on the Continent. “The Germans will take of it,” he predicts. And in the U. S., he expects that an improving economy will eventually help ease fiscal pressures for most state and local governments by generating higher tax revenues over the next year or two.

Professor William F. Ford holds the Weatherford Chair of Finance in the Jennings A. Jones College of Business at Middle Tennessee State University. He formerly served as dean of the Business School at the University of Denver; president of the Federal Reserve Bank of Atlanta; president of First Nationwide Bank; senior vice president of Wells Fargo Bank; and chief economist of the American Bankers Association. He holds a B.A. in economics (summa cum laude) from the University of Texas and M.A. and Ph.D. degrees from the University of Michigan. He is a frequent commentator on Fed policy on Bloomberg Television, CNBC, and other news stations.

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