With three of the committee’s twelve members dissenting, the Federal Reserve Open Markets Committee’s decision yesterday exposes the most divided Fed since 1992.Nouriel Roubini called the three dissenters the “gang of three” in a Twitter post this morning.
An analysis of recent speeches by the three dissenting FOMC voters reveals that this disagreement is based on differing opinions about the current state of the U.S. economy.
Here’s what’s notable about all three dissenters:
– All are presidents of regional Feds. In fact 3 in 4 local Fed presidents with voting rights on the committee dissented with the FOMC decision.
– They all forecast GDP growth around 3% (Fisher is the most bullish on this).
– All dissenters see unemployment as a difficult, but temporary setback that will slowly decrease over time.
– Of primary concern is inflation, which they see as on the rise. All agree that controlling inflation is one of the most important roles of the Federal Reserve, if not its primary obligation.
– All stress action and the articulation of a systematic plan that will give investors and corporations confidence that inflation will remain under control in the coming months.
However, there are important differences among the three dissenters, too. Fisher should be described as the most notoriously hawkish about inflation while Kocherlakota is the most prudish about the economic recovery.
Here’s more on each of the FOMC naysayers:
Richard W. Fisher, Federal Reserve Bank of Dallas: A former funds manager who served as a U.S. trade representative with the rank of ambassador from 1997-2001, Fisher has been President of Dallas Fed since 2005.
Widely regarded as the most hawkish of the FOMC members, Fisher has consistently worried about inflationary pressures that he believes could destroy the economy. He has come out against QE in the past — on the grounds that it could hurt T-bill purchasers like China.
In a June speech, he predicted GDP growth of 3-4% for the rest of the year, and has promised to act to stem increasing inflation whenever he sees it. “I cannot think of anything more damaging to the welfare of hard-working Americans who have jobs, those who are unemployed and barely eking out a living, retirees who are earning minimum returns on their savings, or any consumer already stretched thin, than to have their purchasing power reduced by still higher inflation,” he said.
Narayana Kocherlakota, Federal Reserve Bank of Minneapolis: Kocherlakota is a career economist, who has taught at various universities and did research at the National Bureau of Economic Research during the 1990s. A mathematics prodigy, he entered Princeton University at age 15 and earned a PhD from the University of Chicago just 8 years later.
Though generally regarded as “dovish,” Kocherlakota publicly protested Obama’s stimulus plan because he questioned whether the bill would actually succeed in reviving the economy. Though less publicly critical of inflation than Fisher, he nonetheless believes that core inflation should drive monetary policy decisions. He said in a speech in May that the Fed’s monetary policy decisions up until now have been adequate given the slowly recovering economy, however lags in the effects of policy decisions mean that an increase in the fed funds rate of 50 basis points is necessary right now. He foresees GDP growth to reach nearly 3% by the end of the year, and supports shrinking the Fed’s balance sheet over the next five to six years.
In his opinion, such a minor increase in the federal funds rate coupled with current holdings of government long term securities “would be roughly equivalent to maintaining a fed funds target rate of negative 1.5 percentage points. Such a stance can only be described as being easy monetary policy—just not as easy as late 2010. “
Charles Plosser, Federal Reserve Bank of Philadelphia: Plosser joined the Philly Fed in 2006 after a distinguished career as an academic and consultant to financial corporations.
According to a speech he gave in June, he believes that GDP growth — disappointing in the first quarter — should rebound to 3-3.5% in the second half of the year. Like Fisher, he has publicly addressed concerns about inflation and “very accommodative monetary policy.” He believes the Fed should sell assets in order to maintain a smaller balance sheet and advocates concocting a “systematic plan” to combat inflation.
“A key lesson from the 1970s is that the credibility of the central bank’s commitment to maintaining price stability must be preserved,” he said in June. “We must be willing to act — that is, undertake the necessary and difficult policies to ensure that medium- to longer-run inflation expectations remain stable and our credibility remains intact. This includes taking the right actions at the right time to exit the extreme accommodative policy that is now in place.”