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Analysis
Doves waiting in Fed wings

Doves waiting in Fed wings

Vote rotation will bring nay-sayers on rate increases to the fore

by Darrell Delamaide in Washington

Tue 13 Nov 2018

The November meeting of the Federal Open Market Committee was the last meeting of Federal Reserve policy-makers that won't be followed by a press conference. The December meeting already has one scheduled and Fed Chair Jay Powell has pledged to meet with the press after all eight meetings starting next year.

It was the first FOMC meeting for Mary Daly in her capacity as president of the San Francisco Fed. It was also her first vote, which she cast in favour of the consensus. Daly was director of research for her predecessor, John Williams, now head of the New York Fed, just as he was research director for his predecessor Janet Yellen.

Daly agrees with the Fed's current policy of gradual interest rate increases. She pledged to be data-driven, but clearly will go along with how the FOMC majority interprets the data – declining unemployment will inevitably lead to inflation and the Fed needs to be pre-emptive in raising rates even in the absence of inflationary pressure.

Another new voter, Richmond Fed Chief Thomas Barkin, who took office in January, was upbeat early in October. The economy is enjoying tailwinds rather than headwinds. For Barkin, it is core inflation that counts, and he tends to measure that by prices for durable goods like cars and refrigerators. On the other hand, he is concerned about signals that could come from a reversal of the yield spread.

The two newcomers will rotate out of voting positions after December's meeting. The incoming voters will be balanced, with doves James Bullard of St. Louis and Charles Evans of Chicago offsetting hawks Esther George of Kansas City and Eric Rosengren of Boston.

Bullard made headlines in mid-October by calling for the Fed to stop raising rates. He worries that temporary stimuluses like the tax cut will fade and raising rates risks throwing the economy into recession. Bullard has been calling for a change in how the Fed views the sustainability of current low unemployment and its effect on inflation. So far, the Fed has been able to raise rates because the economy has outperformed.

Bullard has suggested modernising the Taylor rule (an interest rate forecasting model) to take account of low inflation expectations data and reduced inflationary pressure from the labour market. With these adjustments, he said, the Taylor rule would support keeping interest rates at their current level.

At the same time, George hewed to her hawkish message in an October speech, calling for continuation of the rate increases. 'This gradual normalisation of policy seems appropriate to me, given that the FOMC's employment and inflation objectives have largely been achieved while the current setting of its overnight interest rate target remains below estimates of its longer-run value.'

Rosengren echoed these remarks in a late-October speech, acknowledging that the Fed would be moving into 'mildly restrictive' territory as it raises rates to the 3.4% projected in 2021. This is preferable to having to take a more forceful response if the Fed falls behind the curve. 'Of course, if risks become more germane, a different path may be warranted,' he said.

One dove who won't be voting again until 2020 is Minneapolis Fed Chief Neel Kashkari. In a much-noticed commentary for The Wall Street Journal, Kashkari sounded some Trumpian notes by calling for the Fed to stop raising rates and let the economy continue to grow.

'The FOMC should seize this opportunity for a pause,' he wrote in late October. 'With the federal funds rate at 2%-2.25%, monetary policy is now close to neutral, neither stimulating nor restricting the economy.'

The Fed should remain wary of inflation, and act when called for. 'But until inflation or inflation expectations get meaningfully higher,' Kashkari wrote, 'the Fed should allow the economy to continue to strengthen, so as to allow as many Americans as possible to participate in the recovery.' If President Donald Trump wants a true low-interest believer in the chairmanship, he might want to promote Kashkari to the job.

Darrell Delamaide is US editor at OMFIF.

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