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MAKE MONEY BLOG$~With the Federal Reserve, and Chairman Ben Bernanke, under intense media scrutiny, amid unprecedented and unorthodox monetary stimulus and a coming presidential election, it may seem weird that two Fed
Presidents came out with contradictory messages within 24 hours of each other. Earlier this week, Boston Fed Chief Eric Rosengren called for “aggressive, open-ended bond buying” whileDallas Fed President Richard Fisher said “we have done enough,” while asking the Fed to step aside and let markets do their work.
Dissent in the Fed may seem problematic, and it has even almost triggered a Chairman resignation in the ‘80s when Volcker was outvoted by Reagan appointees. But it’s actually a sign of brainstorming, of “thinking outside the box,” which is “something we might want to see more of,” as research economist Michael McCracken put it. During Chairman Ben Bernanke’s tenure, the Fed has seen moments of deep division, at least according to historical standards. The FOMC is a body that generally operates by consensus, as it is “relatively rare for a voting member to dissent,” McCracken explains, who published a paper titled “Forecast Disagreement among FOMC Members,” with Chanont Banternghansa for the St. Louis Fed.
Bernanke faced a historic three-member dissent at the August 9 meeting in 2011, when Richard Fisher of the Dallas Fed, Narayana Kocherlakota of the Minneapolis Fed, and Charles Plosser of thePhiladelphia Fed voted against the Chairman’s language indicating rates would stay at record lows for an “extended period.” It was the first time in 17 years that three FOMC members had dissented, and Fisher, Kocherlakota, and Plosser would do it again for the next two meetings.
Back in 1992, Alan Greenspan faced three dissenters as well, even though the opposition was split in his case. But the most iconic case of dissent was in February of 1986, when then-chairman Paul Volcker faced mutiny at the FOMC.
At that time, President Ronald Reagan had recently appointed four new governors to the FOMC, all of which voted in a bloc against Vlocker to lower the discount rate from 7.5% to 7%; they won 4 to 3. An issue of the Pittsburgh Post-Gazette from March 19, 1986 read “Volcker’s seven-year reign of virtually unchallenged power over the nation’s central bank might be in serious jeopardy.” Volcker “considered resigning immediately,” but remained in office until 1987, when he was succeeded by Alan Greenspan, according to William Greider’s “Secrets of the Temple,” cited by Bloomberg.
The recent contradictory views on monetary policy expressed by Federal Reserve officials act as an additional channel for them to voice their opinions. McCracken explains that “while dissenting views are an indication of disagreement, they are a very coarse metric for evaluating how much an individual member of the FOMC disagrees with the proposed policy actions.” He adds “perhaps a member is 60 percent in favor of [a] policy and 40 percent against the policy, and, therefore, does not dissent. Should we, therefore, conclude that he or she exhibits no disagreement from the consensus view?” Thus speeches, and other actions like economic projections, give greater insights into the inner thoughts of Fed officials.
This year, Bernanke has faced the dissent of Jeffrey Lacker of the Richmond Fed five times. That means he hasn’t had a dissent-free FOMC meeting in 2012. Last year, dissenters made their voices heard in four of the eight meetings, with the aforementioned three dissenters doing so on three occasions.
Yet, it makes sense to hear the Fed’s polyphony of voices during times like these, despite the Chairman ultimately being in charge. The world’s most powerful central bank has lowered interest rates to the record-low zero-range and promised to keep them there until at least late-2014, it has unleashed two massive rounds of monetary stimulus via quantitative easing, it has launched and extended Operation Twist, and has begun giving post-FOMC press conferences, exposing the Chairman to the media.
Still, the economic recovery has been all but existent. Despite record low Treasury yields, unemployment has remained stubbornly above 8% and output has grown less than 2% for quite some time. Europe remains on the brink and the financial framework has been threatened by repeated scandals including Goldman Sachs’ Abacus trades, MF Global’s collapse, JPMorgan Chase’s London Whale trades, Barclays’ Libor scandal, and recently, the near demise of Knight Capital, among others.
As I’ve written previously, Ben Bernanke remains firmly in control of the FOMC. Having weathered unprecedented media and political scrutiny and consistent dissent, the bearded Chairman is still the man calling the shots; all while pushing for further channels of Fed communication with markets and the public. Dissent and differing, even contradictory, opinions seem to be a good thing, as they indicate that several opinions are being voiced within the FOMC.
source: forbes.com
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