Why some Fed vot­ing mem­bers hold more in­flu­ence

Daily Local News (West Chester, PA) - - BUSINESS - By Martin Crutsinger

Janet Yellen’s Fed­eral Re­serve has demon­strated one of the core tenets of cen­tral bank­ing: On the Fed panel that sets in­ter­est rates, some votes are more equal than oth­ers.

The panel — the Fed­eral Open Mar­ket Com­mit­tee — voted Wed­nes­day to keep rates un­changed, some­thing it’s done for six straight meet­ings. What was un­usual this time was that the re­sult drew dis­sent­ing votes from three mem­bers — the most dis­sents in nearly two years.

The 7-3 vote re­flected “no” votes from the pres­i­dents of three re­gional Fed banks — Es­ther Ge­orge of Kansas City, Loretta Mester of Cleve­land and Eric Rosen­gren of Bos­ton. All wanted to raise rates im­me­di­ately. And all were pow­er­less to do so.

Not since De­cem­ber 2014 had so many pol­i­cy­mak­ers dis­sented from a Fed vote. But crit­i­cally, the “no” votes Wed­nes­day in­cluded none of the Fed’s in­flu­en­tial board mem­bers in Wash­ing­ton.

The FOMC’s vot­ing mem­bers are made up of seven board mem­bers in Wash­ing­ton (there are two va­can­cies); the head of the New York re­gional Fed; and four of the 11 other re­gional bank pres­i­dents who serve on a ro­tat­ing ba­sis.

The last time any board mem­ber has dis­sented from a Fed pol­icy vote was more than a decade ago, in 2005.

That’s where the un­equal na­ture of Fed votes comes in. The Fed isn’t like the Supreme Court, where 5-4 rul­ings are com­mon. Fed lead­ers gen­er­ally pre­fer votes that are unan­i­mous or nearly so — to fos­ter con­fi­dence among in­vestors that it’s pur­su­ing rate poli­cies that com­mand broad sup­port.

But if Fed lead­ers can’t get all vot­ing mem­bers of the FOMC to back them, they can still pre­serve mar­ket con­fi­dence if they en­joy the sup­port of all mem­bers of the board. Like the Fed chair, the board mem­bers are hand-picked by the pres­i­dent and con­firmed by the Se­nate to a job in which they’re sup­posed to rep­re­sent the en­tire coun­try.

By con­trast, the re­gional bank pres­i­dents are cho­sen by the boards of each re­gional bank. They tend to rep­re­sent the views of busi­ness lead­ers in their dis­tricts, and they are of­ten per­ceived as be­ing sym­pa­thetic to bank­ing in­ter­ests and quicker to sup­port in­creases in in­ter­est rates.

Once dur­ing the mid1980s, when Paul Vol­cker, then the Fed chair, was out­voted by the seven-mem­ber board, he went to Trea­sury Sec­re­tary James Baker and of­fered to re­sign. Baker re­solved the con­flict by per­suad­ing Fed board mem­bers to change their votes and back Vol­cker.

Yellen, like most of her pre­de­ces­sors, has man­aged to main­tain solid sup­port among the board and the New York Fed pres­i­dent. Wed­nes­day’s vote showed that the chair, mind­ful that she and her al­lies rep­re­sent the cen­tral bank’s power base, isn’t un­duly both­ered by a trio of dis­sents from re­gional bank pres­i­dents.

“Yellen is not los­ing con­trol of the com­mit­tee,” said Brian Bethune, an eco­nomics pro­fes­sor at Tufts Univer­sity in Bos­ton. “As long as a Fed chair has the sup­port of the board, she will feel com­fort­able.”

That doesn’t mean the re­gional Fed pres­i­dents have no in­flu­ence. Some econ­o­mists say they think the Fed’s state­ment Wed­nes­day was shaped to sig­nal that a rate hike is com­ing, prob­a­bly in De­cem­ber, in part be­cause of the grow­ing num­ber of dis­sents.

“Three dis­sents are not nor­mal; they are rare,” said David Jones, who has writ­ten books on the Fed’s his­tory. “This is some­thing Yellen is go­ing to have to deal with.”

The bet­ting is that she will deal with it by steer­ing the com­mit­tee to sup­port a rate hike by year’s end. An­a­lysts said they would be ex­pect­ing a rate hike at the next meet­ing in Novem­ber if it were not oc­cur­ring less than a week be­fore the pres­i­den­tial elec­tion. They think the Fed wouldn’t want to be rais­ing rates so close to the elec­tion for fear of be­ing seen as in­flu­enc­ing the vote.

Far from seem­ing flus­tered by Wed­nes­day’s three dis­sents, Yellen said at a news con­fer­ence that it’s help­ful that the Fed’s pol­icy panel rep­re­sents a range of views.

“The FOMC is not a body that suf­fers from group think,” she said.


Fed­eral Re­serve Board Chair Janet Yellen lis­tens to a reporter’s ques­tion dur­ing a news con­fer­ence on the Fed­eral Re­serve’s mon­e­tary pol­icy on Wed­nes­day in Wash­ing­ton.

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