Sometimes we make too much of the changing of the guard at the Fed. All Fed members are available and contribute to the discussion at all the meetings. But when it comes time to vote only the eligible voters have their say.
It is sometimes easier to be a vocal critic on the sidelines than to be a voter who must cast a public ballot. Moreover, when you know others may dissent that may make one a bit more reluctant to cast a vote in dissent because we know that having one dissenter is not an issue at the Fed but having more than one is much more so an issue. One dissent happens and can be written off to someone being eccentric, hard-headed or doctrinaire. But having two dissents is more of an issue, and hints at a schism. Having three dissents is an indication of severe divisions within the Fed. After all if three dissent how many more may had disagreed but not crossed that line? Were any other dissenters placated to not cross the line? Three is bad number. AND seeing three dissents this year is a possibility…not a certainty but it’s possible. Zero also is possible, but not likely.
Still, for all this talk about dissent and possible dissenters, there seems to be little chance that Bernanke will wind up voting as part of the minority any time soon. In a big picture sense there is a lot of worry about ‘nothing.’ A dissenting vote does not by itself do anything to the Fed or the Chairman’s ability to pursue the policy he desires... unless having a dissent or two …or more bothers him.
A dissenting vote may not even be a sign that the Fed is split in a way that impedes its ability to act. There are some functions that are reserved for the Board of Governors and are not for the FOMC. Since Bernanke has much more agreement and backing on the Board the potential for dissent, which comes mostly from new voting district bank presidents, does not have the same ability to disrupt Fed policy for those decisions that are relegated to the Board (for example, deciding to accept or reject discount rate change requests from the district banks – that is Board decision not an FOMC decision). Decisions at the Fed are by majority - period. The minority dissenting members on the FOMC get to issue separate statements about their dissent and sometimes that can be a bit ‘embarrassing’ but it does not impact policy directly.
The board members include two economists and four others with banking, legal, regulatory or Wall Street experience. Bernanke and Yellen are the economists. For the most part Yellen is identified with liberal causes and is expected to be a supportive of the Fed’s path for continued accommodation. The other board members are not monetary policy specialists and are unlikely to have strong views on the subtle macroeconomic arguments du jour. They are most likely to support the Chairman and his judgment.
Among the district bank presidents we have more economists and more with ideology. Bullard, Pianalto, Ronsengren and Hoenig cycle off the vote. Evans, Plosser, Fisher and Kocherlakota cycle on. All except Fisher are economists. Of the new voters Plosser and Evans are conservative and their economic views characterized as ‘monetarist.’ Fisher has a financial markets background and is less ideological in that sense but he is a ‘hard money’ guy. Kocherlakota has moved over from academics and had written or said things that sounded somewhat divisive with respect to the Fed’s current policy tact; but he has since has said rather pointedly that it is his desire to more or less fit in suggesting that he is not intending to make his point via hard-nosed ideology and dissent.
That raises another issue. Evans who taught at the U of Chicago is a clear conservative monetarist; nonetheless he took the most extreme ‘dove’ position on the Fed (not as a voter as he did not vote , but in his public speeches). He positioned himself to the ‘left of’ Bernanke calling for a raised inflation target ‘for a time’. I nonetheless label him a doctrinaire monetarist given his background. Yet, he found compelling evidence for the Fed to push for more accommodation. Indeed, Bullard who had voted in the last round, was in favor of using the Fed balance sheet as a policy instrument (surrogate monetary base measure) and to apply a sort of monetarist approach to tis size in a novel way. His idea would have provided protection on the upside if the economy began to perform. Bullard, also a monetarist, found a way to support the Chairman although he wanted somewhat more of a framework around policy than just an ongoing ‘easy money’ bent. Therefore as an assenting monetarist, Evans does not stand alone. His stance is unusual but so are the times. As a voter it is unlikely he will turn this view on dime- even on an inflated one. But he does have a framework that could change his vote if the economy were to shift gears fast enough and shift the risks. His stand comes from an ideology that interacts with his perception of the economy’s position – and the economy’s position can change.
Beyond the rhetoric of dissent, the real question is of Bernanke and how much consensus he will seek. One thing dissenters have is the ability to bargain a vote in dissent for some change in language in the Fed’s statement. If there are enough dissenters the Fed Chairman may prefer to try and alter the Fed’s language rather than to risk more ‘widespread’ dissent and the appearance of there being a schism which could cost the Fed ‘something’ in terms of market reaction to its polices.
For now Plosser and Fisher emerge as the most likely to take up the mantle of Hoenig as dissenter. Whether there is one dissent or more than one remains to be seen. If the risks in the economy shift to more growth and less inflation slippage Evans could be pulled out of the dove camp. But it will take some time for him to undergo that transformation. Kocherlakota will remain an enigma until we see how he settles in and if he can find a space of influence as part of the discussion. As we mentioned at the start all members are contributors to the discussion. But if the Chairman is interested in avoiding dissent he will have to listen more closely to those who vote than to those who do not. In the event that Kocherlakota’s views harden or that he thinks the committee is not taking his side of the argument to heart he is a potential candidate to go the way the way and to dissent eventually, though he does not come in with a chip on his shoulder.
More broadly it is the economy that will decide policy. There is already a good deal of debate on how quickly the Fed might actually shift gears. For the moment, Bernanke is full bore on completing the Fed’s Q-easing program. For that program to have full impact this is the right posture for him. But should the economy gain momentum, should job gains begin to look more solid, should the flirtation with deflation (really, with disinflation) take a turn the other way, various changes in view could be put into play.
We have a malleable Fed, at least at the district bank level. The Board seems to be more devoted to the Chairman with the possible exception of Yellen, although time will tell on that one. It would be ‘awkward’ for the chairman and vice-chair to disagree; we say it happen when Paul Volcker was Chairman but he eventually was dealt with a BOARD by the president himself that would disagree with him. Volcker had district bank presidents that supported him and that combination proved to be his undoing. Bernanke is on more solid ground with what seems to be full board support – at least for now.
I could see events beginning to shift votes or to harden dissents if policy did not shift quickly enough as the economy did. I still don’t’ see the economy or risks turning fast enough for the Chairman to lose the support of the Board. That is to me one of the least likely developments for 2011.
Bernanke remains in control. But how much dissent he gets and how he chooses to deal with it are still issues that remain clouded they are the exact pins on which the Fed’s actual policy pronouncements will turn.
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