Too Much Deference to Fed Chairmen is Stunting Policy Debates, Former Governor Says

There hasn't been dissent from a Fed governor in 10 years

Bank Of England Governor Mark Carney News Conference Following Warsh Review Publication

Kevin Warsh, former governor of the U.S. Federal Reserve board. 

Photographer: David Paul Morris/Bloomberg

There is a strange routine that unfolds at the meetings of the Federal Open Market Committee, the panel that sets interest rates.

People debate and disagree. They fret about whether the current stance of monetary policy fits economic conditions. And then they mostly vote in unison, as they have at every meeting this year.

Kevin Warsh, a former Fed governor and a key adviser to former Chairman Ben S. Bernanke during the financial crisis, has some theories about why that is.

Warsh is fresh off a review of the Bank of England's transparency commissioned by Governor Mark Carney. That experience gave him some insights into how the two central banks are similar and different.

He notes that the governor, who heads the Bank of England, was outvoted nine times since 1997. By contrast, the Washington-based Fed Board of Governors rarely dissents against its chairman. The last time was in 2005 by then-Fed governor Mark Olson. 

Dissent by governors is uncommon, as the chart below from the St. Louis Fed's research shows. (Warsh never dissented either, though he on occasion held views that differed from the consensus.)

Orange bars represent the number of dissents from regional Fed presidents, and blue bars represent the number of dissents from Fed governors. 
Orange bars represent the number of dissents from regional Fed presidents, and blue bars represent the number of dissents from Fed governors. 
Source: Federal Reserve Bank of St. Louis

Regional Fed presidents, who aren't politically-appointed board members, dissent more frequently. Three voted against the committee majority in December.

"The tone-at-the-top set by the chairman surely impacts the discussion inside the committee room," Warsh wrote in a paper he is presenting at a central banking conference at Stanford University's Hoover Institution Thursday. "It is worth considering whether the leader of the committee crowds-in or crowds-out the discussion."

In the end, Warsh says the chairman's influence, and the publication of meeting transcripts that lead to stilted remarks inside the room, are to blame for "less robust deliberations."

That conclusion is important to the Washington policy debate going on now. Richard Shelby, the chairman of the Senate Banking Committee, recently introduced a bill that also proposes changes to the Fed.

Implicit in Shelby's draft is a sense that Fed governors lack independence. His bill would give them their own staff as a counter to the current set up of the Fed's forecasting and policy staff who report to the chairman. While the bill may not become law, it nevertheless shows Congressional concern about the need for people with 14-year terms to stand for their views.

Michael Hanson, a senior economist at Bank of America who worked at the Fed in 2009, said there may be another reason why governors have gone quiet in recent years. The benchmark policy rate has been at zero since December 2008. With no room to cut rates further, the Fed has resorted to the power of its words (such as offering guidance on how long it will keep rates low) to continue bolstering the economy. Under these conditions, a bunch of clashing voices could blunt the policy signal rather than sharpen it, and Fed officials want to make sure investors understand their sense of timing for the first rate increase since 2006.

"If communication is an important tool, then sending out mixed messages is going to undermine that tool," Hanson said. Still, it would be beneficial for the "democratic ethos" if each of the governors would explain on a more regular basis why they voted the way they did, he said. 

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