Fed Preview: New Voting Members, New Nominees, Same Policy

Fed Preview: New Voting Members, New Nominees, Same Policy

Investing.com  | Jan 28, 2020 16:32

The Fed's policymaking, Federal Open Market Committee (FOMC) will undergo a significant shift at its January meeting this week, as four new regional chiefs rotate into voting positions.

Also on the horizon is the arrival of two new members on the Washington-based board of governors as President Donald Trump has finally gotten around to formally announcing his intended nominees (though he has not yet sent the nominations to the Senate). He originally floated their names in July, but it seems nobody has been in a hurry to get them vetted, nominated and confirmed.

However, none of this is likely to matter much in the near term because, barring an emergency, the Federal Reserve is unlikely to make any changes in monetary policy.

Some Different Voters But Little Reason For Dissent

Gone are the days when FOMC voters would dissent because they disagreed with raising or lowering interest rates. Unless one of them gets agitated about rising unemployment or increasing inflation, there will be little reason to dissent from the consensus in the coming months.

The FOMC is designed to give a clear majority to the Washington crew, with seven members on the board of governors when it is at full strength. And those board members dutifully follow the lead of the chair, with rare exceptions.

That may change if one of Trump’s nominees, Judy Shelton, gets the nod from the Senate to take a seat on the board. Shelton is most famous for favoring a return to something like the gold standard, though she has backed off from that to accommodate Trump’s wishes for easy monetary policy. She has also made heretical remarks to the effect that the central bank should not be independent of politics.

Shelton won Senate confirmation with a voice vote in 2018 to serve as the executive director for the U.S. at the European Bank for Reconstruction and Development in London. Theoretically, she should have no trouble getting confirmation for the Fed post, though it is obviously much higher profile.

The other nominee, Chris Waller, is a safe bet. He spent a decade as chief economist at the St. Louis Fed. A former academic, he is not likely to rock the boat, ever.

The board has had only five members for some time, but the New York Fed chief, John Williams, is a permanent voter because of his role in implementing monetary policy; he also votes with the chair as a rule. The three dissenters to the FOMC consensus in September set a high-water mark for discord, but the vote was still seven in favor. All three of them—James Bullard of St. Louis, Eric Rosengren of Boston and Esther George of Kansas City—rotate out of voting positions this year.

The new voters in 2020 will be the hawkish Loretta Mester of Cleveland, balanced by the dovish Neel Kashkari of Minneapolis. Neither will have much to dissent about, however. The other two new voters—Patrick Harker of Philadelphia and Robert Kaplan of Dallas—have not been in office that long and have yet to register a dissent (though Harker said he would have dissented from the October rate cut had he been a voter in 2019).

There are 12 regional bank presidents, but with New York having a permanent vote, it is the other 11 who get to vote only every two or three years (Cleveland and Chicago alternate every other year and the other nine rotate in every third year).

The regional presidents, picked by their respective boards, tend to stay in office a long time. They have higher salaries than board members and their own big staffs of supervisors and economists, so they are not shy about having a different opinion than the board.

The Fed is in the middle of a strategic review, examining new and old policy tools. Recent minutes had policymakers discussing a possible cap on Treasury yields—a tool last used in the 1940s but not dissimilar to quantitative easing. These recent discussions also indicate they do not favor the negative interest rates being used in Europe and elsewhere.

These deliberations are hardly market-moving and will last the greater part of the year. In any case, markets will certainly be paying less attention to the Fed after Chair Jerome Powell has more or less said the central bank will be on autopilot and will only change monetary policy when economic conditions change.

Investing.com

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