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Monetary Policy

Will the Fed Go Easier? Not If the Hawks Win

Ben S. Bernanke, chairman of the U.S. Federal Reserve, delivers his semiannual monetary policy report to the Senate Banking Committee in Washington on July 17, 2012.

Photograph by Joshua Roberts/Bloomberg

Ben S. Bernanke, chairman of the U.S. Federal Reserve, delivers his semiannual monetary policy report to the Senate Banking Committee in Washington on July 17, 2012.

The Wall Street Journal and the New York Times both topped their front pages on Wednesday morning with stories speculating that the Federal Reserve will do more to stimulate growth when the Federal Open Market Committee meets next week. “Fed Moves Closer to Action—Central Bank Prepares Steps to Spur the Economy Unless the Recovery Picks Up” was the headline on Jon Hilsenrath’s story in the Journal. The Times led with “Fragile Economy Said To Push Fed To Weigh Action,” by Binyamin Appelbaum.

Fed Chairman Ben Bernanke could easily round up the votes for more easing. The question is whether he feels so strongly that more action is needed that he’s willing to risk the wrath of the hawks on the rate-setting FOMC.

Unlike the Supreme Court, where 5-4 decisions are common, the Federal Open Market Committee prefers to act by consensus. Lately it hasn’t quite managed that—Jeffrey Lacker, a hawk who is president of the Federal Reserve Bank of Richmond, has voted against the Fed’s easy-money policies for the last several meetings. Alan Blinder, a Princeton University economist who was vice chairman of the Fed during Alan Greenspan’s chairmanship, told Bloomberg Television’s Eric Schatzker and Scarlet Fu on July 2 that “there’s a big civil war going on in the Federal Reserve.

Taking even more extreme measures to ease financial conditions in hopes of sparking economic growth would further upset Lacker and other “hawks,” so called because they worry more about inflation than weak growth.

Collegiality is the issue, not votes. Although all the presidents of the 12 regional Federal Reserve banks participate in deliberations, only five at a time have votes, and it so happens that Lacker is currently the only hawk with a vote. Charles Plosser of Philadelphia would vote with Lacker if he could. Other current non-voters who might break away from Bernanke, especially if the Fed went further, are Richard Fisher of Dallas, James Bullard of St. Louis, and Narayana Kocherlakota of Minneapolis.

Bernanke seems to find it easier to resist the entreaties of the doves on the Federal Open Market Committee, led by Charles Evans of the Chicago Fed, who says the Fed should vow to keep short-term interest rates near zero until either the unemployment rate goes under 7 percent or the medium-term outlook for inflation goes above 3 percent. The majority of voters on the committee will tend to support Bernanke in whatever course he favors, as long as it’s not too far outside their comfort zones.

Why might Bernanke hesitate to get the FOMC to ease? Because the Fed is already in uncharted territory. Never before has it kept rates so low for so long. There’s a risk that going even further—say, by printing more money and using it to buy more bonds—would cause unpredictable harm to the economy. Given the uncertainty, the easiest course for Bernanke is to stand pat and keep the hawks from becoming even more upset. Of course, standing pat increases the opposite risk, that the U.S. economy will get stuck in a rut of slow growth or slip into another recession.

The FOMC concludes its coming two-day meeting on Wednesday, Aug. 1. All eyes will be on Bernanke because he is the one who could make the difference.

Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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