At a time when most other central banks are conducting monetary policy easing, the eyes of the financial world remain firmly transfixed on the US Federal Reserve – even more than usual.
After hiking interest rates for the first time in nearly a decade last December, the Federal Open Market Committee (FOMC) has, as yet, failed to follow up that increase with another, despite the view communicated in its economic projections earlier this year that a series of rate increases this year was likely.
The inaction in monetary policy has led investors to pay more attention than normal to the utterances of FOMC members, looking for any signal that a change is coming.
With markets currently of the view that another 25 basis point rate hike may not arrive until this time next year, it has never been more important to understand the composition of the FOMC voting members, and how they’re likely to vote when it comes to monetary policy.
Or understanding “Fed speak”, as it is known in markets.
Thankfully, Sean Callow, senior currency strategist at Westpac, has provided an excellent cheat sheet on what to expect when the FOMC member rotation occurs in 2017, breaking down the FOMC members by whether they’re hawkish, or more inclined to raise rates, or dovish, the exact opposite to the former.
The table below from Westpac looks at the composition of the FOMC by permanent and non-permanent voting members, evaluating whether they’re a hawkish or dovish by nature using a simple colour coding.
“We focus heavily on the regional Fed presidents, since they consistently produce the widest divergence in policy views and thus create most confusion in markets over the Fed’s likely policy path,” says Callow.
“The Board of Governors has historically been very unified, rarely dissenting over policy whereas it is common for Fed presidents. However, some differences of opinions emerged in late 2015.”
Here’s Callow’s assessment of the permanent voting members of the FOMC, shown in the left of the table.
- Janet Yellen, chair
- Stanley Fischer, vice chairman of Board of Governors
- Jerome Powell: Argued this month for patience on raising rates, given inflation running below target.
- Lael Brainard. Brainard’s experience in international finance and economics as a former Treasury official informed a key speech in Oct 2015 in which she argued the case for erring on the side of caution when raising interest rates. While she did not dissent against the Dec 2015 hike, her June 2016 speech reinforced this theme. Some pundits see Brainard being asked to be Treasury secretary if Hillary Clinton becomes US president.
- Daniel Tarullo. Mostly focused on financial regulation, Tarullo drew attention in Nov 2015 by arguing that the Fed is “not close” to meeting its inflation target. In July 2016, he said he wants “more convincing” evidence that inflation is moving towards 2%.
- New York Fed president (always votes): Bill Dudley (vice chairman of FOMC). Very much in line with Board of Governors, especially Yellen
Callow notes that there are currently two vacancies on the FOMC for permanent voters, with nominations from president Barack Obama announced in early 2015 still awaiting confirmation from the US Senate.
“Extended periods of vacancies on the Board of Governors are common,” notes Callow. “There appears to be a political standoff regarding the vacancies which seems set to extend through the 2016 election campaign.”
While in Westpac’s table no colour suggests that the member is a policy “neutral” — neither overly hawkish or dovish compared to the central view of the FOMC — Callow notes that for those regional Fed presidents that will vote in 2017, three of the four, as yet, have not revealed a particular voting tendency one way or another.
“There are three new-ish Fed presidents due to vote for the first time in 2017, none of whom have yet earned an obvious hawk or dove label,” he says.
Here’s Callow’s assessment of the four incoming voting members, based on what they’ve communicated so far.
- Dallas Fed president Robert Kaplan so far sounds less hawkish than his predecessor Richard Fisher. In Jan 2016 Kaplan said he expects to be a centrist in his time at the Fed. This month in a visit to China, he focused on global disinflationary forces (including from Chinese exports) and the fall in the US neutral interest rate.
- Former Treasury official and PIMCO MD Neel Kashkari replaced Narayana Kocherlakota (who had been the most dovish FOMC member) as Minneapolis Fed president in Jan 2016. The Minneapolis Fed historically leans hawkish but Kashkari said this month that he doesn’t see much inflationary pressure and that the Fed has “the luxury of time” in raising rates. He is the youngest Fed president and a keen Twitter user.
- Philadelphia Fed president Patrick Harker looks to be tending slightly hawkish, though not to the degree of his predecessor Charles Plosser. In July, Harker said it may be appropriate to raise rates twice in 2016 and projected the funds rate to “approach” 3.0% by end-2018.
- DOVE: Charles Evans, Chicago. Evans started 2016 expecting 2 rate increases in 2016, compared to the Dec 2015 FOMC median projection of 4. This month Evans said he doesn’t see core PCE inflation rising above 2% until 2018, but could go along with “one rate increase this year”.
While markets know how the FOMC’s permanent voting members have acted based off past voting patterns and communications, as communicated by Callow, there is a large degree of uncertainty attached to how the class of 2017 will vote.
One suspects that there’ll be plenty of focus on speeches from Kaplan, Kashkari and Harker in the months ahead, along with upcoming economic data, to help formulate a view on what way the Fed will proceed with policy heading in to 2017.