This post is a guest contribution by Asha Bangalore* of The Northern Trust Company
Recent Fed rhetoric suggests strains of disagreement gaining momentum within the FOMC. A composition of the FOMC is handy before evaluating the positions of the members. The FOMC consists of seven members of the Board of Governors and five Reserve Bank presidents. There are three vacant spots in the Board of Governors to be filled following the resignation announcement of Vice Chairman Kohn (effective as of June 23, 2010). Presidents Hoenig (Kansas City), Bullard (St, Louis), Rosengren (Boston), Dudley (New York), and Pianalto (Cleveland) are current voting members of the FOMC in addition to the five governors – Ben Bernanke, Donald Kohn, Elizabeth Duke, Daniel Tarullo, and Kevin Warsh.
Of the Fed presidents, Hoenig is a hawkish member who dissented at the January FOMC meeting. His remarks today suggest a likely dissent at the March 16 meeting. At the January meeting, he was of the opinion that low rates for an extended period were no longer necessary. In his speech today, he went further and indicated that the Fed must be prepared to raise rates while the jobless rate is still high.
As recently as last week, Chairman Bernanke testified that low short-term rates will prevail for an extended period of time. Philadelphia Fed President Plosser (non-voting member and a hawk) in a Q&A with The Wall Street Journal (Q&A: Philly Feds Plosser ) noted that he is uncomfortable with the “extended period” language. Plosser is more bullish about underlying economic conditions and he indicated that he would prefer a sale of mortgage-backed securities and agency books sooner rather than later. Presidents Pianalto, Rosengren, and Dudley largely share the economic outlook of Chairman Bernanke. President Bullard of the St. Louis Fed has a mixed view. Bullard is supportive of the monetary accommodation and low interest rate environment but finds the upward trend of inflation expectations worrisome. In recent days, the spread between the yield of nominal 10-year U.S. Treasury note and 10-year inflation protected Treasury security has declined roughly 13 basis points to 2.15%. Inflation expectations are important but at the present time they are non-threatening (see chart) and given the projected sub-par growth path of the economy in 2010, inflation and inflation expectations should be on the Fed’s worry list of 2011/2012.
Fast forwarding to the post Kohn Fed, if the three vacancies are not filled as of the August 10 Fed meeting, the FOMC will consist of four governors and five Fed presidents as voting members. Hypothetically, the balance of power would shift away from Fed governors to regional Fed presidents. All else the same, Fed rhetoric is lacking an unified voice at the present time. The track record of Fed forecasts pertaining to the financial crisis and the following recession is not stellar, particularly that of the two hawkish Fed presidents who were projecting a growing economy with inflationary concerns in early-2008 (Speech – The Economic Outlook for 2008 and Speech – The Economic Outlook). Stormy macroeconomic discussions at FOMC meetings with dissents and disagreements could be in store in the months ahead.
Source: Northern Trust – Daily Global Commentary, March 2, 2010.
*Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.
