Most Fed Dissents Since Volcker Builds Pressure for Yellen Hike

  • Fed chair has faced more opposition than Bernanke or Greenspan
  • Yellen seeks to avoid conflict and favors building consensus

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Policy makers at the Federal Reserve are becoming increasingly divided under Chair Janet Yellen.

Members of the interest-rate setting Federal Open Market Committee have dissented 7.7 percent of the time since Yellen took the helm in 2014, a figure that includes the three central bankers who wanted to raise rates at the last meeting in September. That’s the largest proportion of dissent since Paul Volcker left as chairman nearly three decades ago.

A growing divide signals mounting pressure on the U.S. central bank to raise rates for the first time since December, said Vincent Reinhart, chief economist at Standish Mellon Asset Management Co.

The dissents “suggest an underlying consensus toward action,” said Reinhart, who was a top adviser to former Fed chairmen Ben Bernanke and Alan Greenspan. “They underscore that a portion of the committee is getting impatient and that action will soon be forthcoming.”

Common Ground

Yellen has tried to foster consensus, which can signal that officials think the chair has policy on the right track, assuring investors in times of stress. She generally speaks with each regional Fed chief before every FOMC meeting, records of her diary show, and has spelled out why it matters.

“We have to tolerate some dissent,” she said on Dec. 2. “Nevertheless, I think for the FOMC to be successful and to communicate a coherent policy to the public, we do need a certain degree of consensus. And I think one of the strengths of the committee is we do try to find common ground.”

Still, Yellen has faced almost one opposing vote per meeting, a pace that slightly exceeds her predecessor Bernanke. The number of dissenting votes hit an almost two-year high in September, and notably included Boston Fed President Eric Rosengren, who in the past had pushed for easy monetary policy.

There was about one opposing vote every other meeting under Greenspan, while G. William Miller and Volcker faced the highest level of division during their leadership in the 1970s and 1980s.

The level of dissent within the FOMC is affected by conditions in the economy, with Fed officials inclined to close ranks around the chair in times of crisis and feel less constrained when the economy is on relatively solid ground. But the calendar also plays a role, due to an annual vote rotation among regional Fed presidents. This can see hawkish officials who favor tighter policy are replaced by more dovish colleagues, or vice versa.

All policy makers take part in discussions at FOMC meetings, held roughly every six weeks, but only a maximum of 12 vote on policy. That includes the seven members of the Fed Board in Washington when all its seats are filled -- currently there are two vacant slots -- plus five of the 12 regional Fed banks chiefs, whose voting composition changes every year.

Some central bankers without a vote have been vocal about their views, such as Richmond Fed President Jeffrey Lacker, who said in October he would have pushed for higher rates in the prior month’s meeting. He won’t have a vote until 2018.

For an in-depth look at Fed’s rationale for holding rates, click here.

The three Fed voters who dissented in September have given no indication they will fall in line at the Nov. 1-2 meeting, when the FOMC is widely expected to keep rates unchanged for a seventh straight time.

Rosengren of the Boston Fed voiced concern in an Oct. 15 interview about the risk of asset bubbles and inflation if the central bank keeps rates too low for too long. Cleveland Fed President Loretta Mester, who voted in favor of a hike in September, said in October that monetary policy must be “looking ahead and not just waiting.” Kansas City’s Esther George, who has dissented at the past two meetings, said she favors higher rates in light of a tightening labor market and rising inflation.

Conflicting Views

Former Fed official Roberto Perli said division at the central bank reflects confusion about the correct policy amid a slow economic recovery and uncertain outlook on inflation. Gross domestic product has grown only 2.1 percent annually since the recession ended in 2009 and it’s unclear when inflation will reach the central bank’s 2 percent target.

“Views are more divergent than usual, which in turn has produced more dissents,” said Perli, who is now a partner at Cornerstone Macro LLC in Washington.

Notably, none of the dissent in recent years has come from Fed governors, political appointees who are nominated by the U.S. president and confirmed by the Senate.

While that suggests underlying support for the chair, that unanimity has also been raised as a concern. Lacker said in an October speech that governors may be “less insulated” from the political process because they typically serve shorter terms, while Fed presidents are willing to challenge conventional views.

Bernanke has argued that a certain degree of division can be healthy. He tried to make the FOMC less centered around the chair’s views and encouraged officials to speak up and make their opinions known.

Reserve Bank presidents understand that they should use dissent only sparingly, according to Al Broaddus, who led the Richmond Fed from 1993 to 2004 during Greenspan’s chairmanship. Greenspan faced challenges during difficult periods of his tenure, notably from Broaddus himself, though division eased toward the end of his time in office.

“Legitimacy and credibility are very important to the Fed,” Broaddus said. “Several dissents during temporarily difficult periods pose no threat, but sustained dissents over longer periods raise questions.”

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