Growing Divide at the FOMC

The Federal Open Market Committee is an unusual organization in that it has members from the Federal Reserve Board and also the regional bank presidents. They’re not the same thing and they sometimes conflict.

Janet Yellen places a high premium on consensus, which is probably misplaced. In Washington, people seem to like consensus for the sake of saying they have a consensus.

Lately, however, the reserve bank presidents have grown more hawkish about monetary policy. They think interest rates will need to rise by the middle of the year. But the Fed governors are much more reluctant. I understand the hawks’ view that deflation will soon pass, but I think there needs to be more evidence of that. But there has been more evidence that workers’ pay has increased. Plus there’s been high-profile news such as the workers at Walmart getting raises.

Reuters notes:

Seven of the Fed’s current 17 members have now said they at least want the option of a June tightening on the table, or have pushed in general for an earlier increase amid an expectation that wages and inflation will turn higher.

By contrast, there’s a dwindling core of officials who say publicly that the economy and labour markets in particular still have a long way to go — only four Fed members have in recent weeks clearly said that rate hikes won’t be appropriate until much later in the year or even into 2016.

The five members of the Fed’s Washington-based board of governors, including Yellen, have spoken less definitively, though governors including Jerome Powell have said they expected strong job growth to continue. Not all of the seven who point to June vote this year on the Fed’s ten-member policy setting committee, but all participate in policy discussions.

The FOMC meets again later this month and is expected to removed the “patient” wording from its policy statement. I bet Yellen isn’t thrilled about that move but for consensus reasons, she may have to go along. The last time the Fed raised rates was June 2006. The futures market currently thinks a rate increase will come in September or October.

Why are higher rates so important? It all comes down to competition. Higher short-term rates provide strong incentive for investors’ money. When rates are at 0% and many stocks yield 2%, then the stock market is a no-brainer. But when they both get you 2%, then you need to be a lot more careful.

Posted by on March 2nd, 2015 at 9:54 am


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