Individual member misgivings on tapering unlikely to flare into open dissent
Tomorrow afternoon Eastern Summer Time the Federal Open Market Committee assembles in Washington DC for the sixth of the year’s eight scheduled meetings and the world’s financial markets will then await with bated breath the result of the committee’s deliberations in the early evening BST the following day. More than with any other central bank meeting around the world this year, the decisions made at this week’s FOMC gathering could have profound effects on currency rates and economic fortunes globally.
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No-one will be more aware of this prospect than US Federal Reserve chairman Ben Bernanke who, as is customary, will chair the meeting. The use of extraordinary monetary policy in the United States to address the financial and economic shocks of the past six years has been entirely during Bernanke’s watch as chairman. Given the widespread speculation that he will not seek (or, for that matter, be offered) another term when his present tenure expires next January 31, conjecture which Bernanke himself has done little to assuage, history may well treat the decisions announced Wednesday afternoon as his swansong.
FOMC meetings, held in the elegant meeting room in the Fed’s Eccles Building headquarters, follow a fairly rigid procedure, with the Tuesday given over to presentations on the US economy and the state of the dollar from a succession of in-house Fed experts. In addition to the 12 voting members of the FOMC – comprising the seven members of the Fed’s board of governors, the president of the New York Federal Reserve Bank (a permanent, voting position) and the presidents of the four other district Federal Reserve banks with current-year voting status – the meeting is also attended by the non-voting district bank presidents and a coterie of economic, legal and policy advisers.When all the presentations are done, the FOMC gets down to a debate on the crux of matters. This week’s meeting was signaled back in May as the occasion for the tapering decision and, whilst of course the result could be simply to kick for touch, nothing said in the intervening period has disabused market expectations that this meeting is crunch-time for QE.
What can be taken pretty much for granted is that there will be a vigorous debate on whether now is the time for tapering to start; in other words it’s by no means a foregone conclusion. The release of the verbatim transcript of an FOMC meeting lags the event by five years – presumably to protect the innocent – but the minutes are produced three weeks later and those of the most recent, at the end of July, indicate a wide range of views amongst the 12 voting members on whether and when to start winding back the $85 billion per month in Treasury bond and mortgage-backed securities purchases.
At the July meeting there was only one formal dissent to the decisions made, being to maintain both the pace of asset purchases and the federal funds rate target – that of Esther George, president of the Federal Bank of Kansas City. As indicated in the minutes, Ms George dissented ‘because she favored including in the policy statement a more explicit signal that the pace of the Committee’s asset purchases would be reduced in the near term’. So mark down the Kansas City Fed’s boss as a tapering bull.
In fact, formal dissent is a relatively rare occurrence in FOMC voting. It is especially rare for members of the Fed’s board of governors to dissent, doubtless in part because they are cut from the same cloth as the chairman himself. And because it falls to the chairman to formulate the resolutions to be put to the vote, it has been unknown in the past for the chairman to himself dissent.
The protocol is for voting to be open, with the chairman voting first and the vice-chair of the FOMC (the position permanently held by the president of the New York Fed) next. The remaining 10 FOMC members then vote alphabetically. In some studies of the process, a trend has been identified for later voters to either show or stay their hand dissent-wise depending on how members higher up the alphabet have voted and a convention during the long tenure of Bernanke’s predecessor, Alan Greenspan, whereby once two members had dissented no others would.Whatever the internal politics of FOMC meetings, the committee’s 12 voting members have a tough call to make on Wednesday. Key numbers on employment and the rate of inflation continue to be mixed. There is bound to be a lingering anxiety that the United States has yet to lock in recovery to the extent envisaged when tapering was first heralded in the Spring.
It’s at least in prospect though that Ben Bernanke’s personal position on tapering will become the consensus position, if for no other reason than the post-meeting press conference may well also host his formal confirmation that he’s retiring from the job, with his colleagues motivated to mark the occasion with a show of unity.
And given the news that leading candidate Larry Summers has withdrawn from contention, media in the post-QE era may well have to get used to a woman in the chair for the first time ever – Janet Yellen’s prospects must have immeasurably improved – with attendant need for avoidance of the gender-specific language rife in the foregoing paragraphs.