Political heat may unite Fed, suppress dissent
Open dissent within the US Federal Reserve this year could set it up for damaging outside criticism, raising the stakes for new Fed voters tempted to take a stand against Chairman Ben Bernanke.
January 08, 2011 / 11:47 IST
Open dissent within the US Federal Reserve this year could set it up for damaging outside criticism, raising the stakes for new Fed voters tempted to take a stand against Chairman Ben Bernanke.
Critics in both the US Congress and foreign capitals attacked the central bank late last year after it decided to ratchet up its bond-buying by USD 600 bn, an aggressive stimulus plan that took it further into unchartered terrain.Bernanke and other top Fed officials defended the plan vigorously, and the Fed's cautious stance appeared to gain vindication on Friday when a US jobs report showed a very muted recovery in the labor market. Yet opposition could return, and even be amplified, this year as two regional Fed presidents known to be uncomfortable with Bernanke's policy get their once-in-three-years turn to vote on the central bank's policy-setting Federal Open Market Committee."The more you see divisions aired publicly from the FOMC, the more critics outside the Federal Reserve system may feel emboldened to speak up," said Dana Saporta, an economist with Credit Suisse in New York. "That's definitely the potential," she said.Last year, Kansas City Federal Reserve Bank President Thomas Hoenig was the reliable, lone contrarian on the FOMC. His dissenting votes were a mainstay, and thus probably lost some impact as observers tried to determine the nature of debate within the Fed over monetary policy.This year, Philadelphia Fed President Charles Plosser and Dallas Fed chief Richard Fisher rotate into voting slots on the policy panel. Both are seen as inflation "hawks" and have raised questions about the efficacy and unintended side effects of the Fed's second round of asset-buying, or quantitative easing, known as QE2.Minneapolis Fed President Narayana Kocherlakota, another contrarian, will also have a vote this year, though he has come out in favor of the policy.All this paves the way for some potential surprises when the FOMC meets for the first vote of 2011 on January 25 and 26."One dissenter can be viewed as a rogue. But once you start getting more than one it looks like a serious disagreement and makes it much more difficult for the Fed to make policy," said Nigel Gault, chief US economist at IHS Global Insight in Lexington, Mass."It does raise the bar a little bit for the potential dissenter in that they really have to be sure that they want to make that statement, by deciding to dissent," he said.Speaking upLoud and sometimes acerbic opposition met the Fed's decision on November 3 to buy USD 600 bn in Treasury securities by the end of June.China and Germany were among those warning that QE2 could spawn asset bubbles in emerging economies, complaining it would keep the US dollar artificially low.President Barack Obama defended the policy -- an unusual move for a US president -- while many conservative economists and Republican lawmakers said it set the stage for a spike in damaging inflation. Two GOP lawmakers pledged to introduce legislation to rewrite the Fed's mandate by stripping it of its focus on jobs, leaving low and stable inflation the only goal.A number of regional Fed bank presidents, including Kocherlakota and Sandra Pianalto, the moderate Cleveland Fed chief, joined top officials in saying QE2 was needed to fend off deflation and lower an unemployment rate stuck near 10%.On November 8, just five days after the Fed agreed on its latest bond-buying program, Fisher called it the "wrong medicine" for the economy. But in his last public remarks on December 1 he was more restrained."Perhaps they saw the need for the Fed to circle its wagons a bit in the face of threats to the very independence of the central bank," said Credit Suisse's Saporta. "It may be the case that some of the other voting members, even if they had reservations, wouldn't dissent outright" in 2011, she said.Fisher and Plosser -- who has repeated in recent months that QE2 is more trouble than it is worth -- dissented together in 2008, when they last sat on the FOMC, in favor of a less-accommodative monetary policy. Both are scheduled to deliver speeches next week that could shed light on their current thinking.Many analysts see public, dissenting views as a result of the give-and-take Bernanke encourages to ensure Fed members think through difficult decisions, especially as the central bank pushed deeper into its unprecedented stimulus plan.Government data on Friday showed US employers hired far fewer workers than expected last month, with a large number giving up the search for work -- dark economic news likely to play into the hands of "dovish" Fed members who endorse QE2.Still, from retail sales to trade data, there are many signs of economic improvement."If we're looking at all the information coming in, things are better," said William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts."As you start to get a consensus change (at the FOMC), that means there is more discussion about the clutching mechanism of going from easing to potentially neutral," he said."It's going to be a new game ... and it's going to help get the market ready for the change." 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