Federal Reserve Chairman Ben S. Bernanke’s plan to hold interest rates near zero through at least mid-2013 provoked the most opposition among voting policy makers in 18 years as central bank consensus frayed.
The Fed chief achieved unanimous support on the Federal Open Market Committee in 2008 when he lowered interest rates to near zero, and in 2009 when he launched $1.73 trillion in bond purchases. Last year, his plan to buy another $600 billion in assets drew one dissent. Yesterday, three policy makers dissented from the decision to apply a specific date to the Fed’s low rate pledge for the first time.
Bernanke’s move shows that a Fed chairman can govern with more than two opposing votes, opening the door to bolder action if necessary, said Roberto Perli, a former economist in the Fed’s Division of Monetary Affairs, which helps craft the language of the FOMC statements.
“We have reached the point where Bernanke is taking control and saying we have to do the right thing no matter how many people dissent,” said Perli, a managing director at International Strategy & Investment Group in Washington. “It shows the committee can move forward.”
Seven members of the panel favored the action. Richard Fisher, president of the Federal Reserve Bank of Dallas, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis voted no, preferring to maintain the existing “extended period” language. The last time three FOMC voters dissented was on Nov. 17, 1992, under Bernanke’s predecessor, Alan Greenspan.
History of Discomfort
Fed officials have a long history of discomfort with pledges that limit their policy flexibility, minutes of their meetings show. The deterioration of the economic outlook, and the limits of monetary policy when interest rates are already near zero, prompted Bernanke to opt for the time commitment -- even at the cost of three dissenting votes, said former Fed Governor Laurence Meyer.
“He must be unhappy about that, but with no regrets,” said Meyer, now a senior managing director at Macroeconomic Advisers LLC. “The chairman is the decider, and he will do whatever he thinks needs to be done.”
Yields on U.S. Treasury 10-year notes fell 0.13 percentage point to 2.119 percent at 10:14 a.m. in New York. The 10-year note yields slid yesterday to an all-time low of 2.0346 percent after the Fed’s statement, before paring its drop. The Standard & Poor’s 500 Index fell 3.2 percent.
The Federal Open Market Committee lowered its economic assessment, saying it now “expects a somewhat slower pace of recovery over the coming quarters.” It left the door open for more action, saying it discussed “the range of policy tools available to promote a stronger economic recovery.”
The dissents may have weighed against stronger action for now, said Vincent Reinhart, a former director of the Division of Monetary Affairs. The FOMC majority could push for further easing at the Fed’s annual conference in Jackson Hole, Wyoming, later this month, he said.
“The dissents signal a strongly divided committee,” said Reinhart, a resident scholar at the American Enterprise Institute in Washington. The Bernanke majority “did less than they wanted to probably. But they set themselves up for Jackson Hole to be a midcourse correction.”
In previous eras, dissents could signal rebellions against the chairman. On February 24, 1986, Paul Volcker was outvoted when four governors appointed by President Ronald Reagan wanted to lower the discount rate.
Volcker considered resigning immediately, according to the book “Secrets of the Temple” by William Greider. He remained chairman until 1987, when Alan Greenspan was appointed.
Meyer, in his 2004 book “A Term at the Fed,” said Greenspan built consensus before meetings, sometimes lobbying governors one by one.
There were “two imaginary red chairs around the table -- the ‘dissent chairs.’ The first two FOMC Members who sat in those chairs were able to dissent. After that, no one else could follow,” Meyer said in the book. A third dissent would represent “open revolt” against the chairman, Meyer said.
Greenspan faced three dissents on November 17, 1992. Unlike yesterday, the opposition was split.
Cleveland Fed President Jerry Jordan dissented in favor of “immediate action” to increase the availability of reserves.
Fed governor John LaWare and St. Louis Fed President Thomas Melzer dissented because they believed the economy was strengthening and central bank policy might “well-establish a basis for greater inflation later.”
Yesterday’s dissents highlight a lack of full support for Bernanke’s policies at a time when the central bank is under greater scrutiny. After the Fed announced a $600 billion second round of bond purchases in November, House Speaker John Boehner and three other Republicans sent Bernanke a letter expressing “deep concerns.”
“The reality is at the end of the day Bernanke has an operational majority and he’s not afraid to ram things through over the objection of the minority,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “There’s nobody on the board who’s likely to dissent, and there’s a handful of presidents who” share Bernanke’s views on monetary easing.
Prior to yesterday’s meeting, there had been 23 dissents during Bernanke’s tenure as Fed chairman. Nine of those came from Kansas City Fed President Thomas Hoenig. He voted eight straight times in 2010 against record stimulus, tying former Governor Henry Wallich’s record in 1980 for most dissents in a single year.
Fisher and Plosser both dissented in March and April of 2008 in favor of less accommodative monetary policy, with Fisher also dissenting three other times that year.
The voting membership of the FOMC next year has members less inclined to open disagreement with the majority, as presidents from Atlanta, Cleveland, San Francisco and Richmond rotate onto the committee.
Atlanta’s Dennis Lockhart and Cleveland’s Sandra Pianalto have never dissented. San Francisco’s John Williams will be new to the committee, though his predecessor, Janet Yellen, never dissented. That leaves Richmond’s Jeffrey Lacker as the only president with a history of dissenting, having objected to five previous FOMC statements.
The FOMC has had divisive debates over pegging interest rates to a time period before. In August of 2003, the committee adopted a phrase from Greenspan’s semi-annual testimony in July and said “policy accommodation can be maintained for a considerable period.”
Debate on Language
After a unanimous vote to leave the benchmark lending rate unchanged at 1 percent, then-Boston Fed President Cathy Minehan began a debate on the “considerable period” language.
“I’m just wondering whether that’s veering a little too much toward the commitment side than we need to or ought to do at this point,” Minehan said.
Presidents Jack Guynn of Atlanta, Hoenig of Kansas City, William Poole of St. Louis and J. Alfred Broaddus Jr. of Richmond were among the seven officials who opposed the phrase among a total of 18 FOMC participants. The majority won after Greenspan called a vote.
Bernanke, then a Fed governor, argued in favor of retaining the phrase, saying it would “go some way to bringing policy expectations in the market toward what I heard around the table during the entire meeting.”
Reinhart, who was involved in formulating the Fed Board’s communication strategy, said a policy maker approached him one day and told him his tombstone would read: “Here Lies Vincent Reinhart, For a Considerable Period.”