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Some precisions about the FOMC in 2016

The essential

Like every year, four of the regional federal reserve banks presidents rotate their voting rights at the meeting. The new voting members seem more hawkish on balance than the predecessors.

However, we should not expect that this could have an impact on the fed funds policy in 2016. As we explain in this article, it is far from unusual that presidents of regional Feds are more hawkish than the members of the Board of governors. The latter are really the ones who are the key players and they are the ones we need to track in priority.

 

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FOMC voting members are not the same from one year to another. In the current format, there are 10 voting members: 5 from the Board of Governors, the New York Fed’s president (William Dudley) and four president of regional Feds (among the presidents of the 11 other regional Feds). While the members of the Board and the New York Fed’s president vote each year, this is not the case for the presidents of the regional Feds for which there is a rotation each year. In 2015, the voting regional Feds’ presidents where Charles Evans (Chicago), Jeffrey Lacker (Richmond), Dennis Lockhart (Atlanta) and John Williams (San Francisco). Lacker is clearly a hawk, Lockhart is slightly less a hawk while Williams and Evans are among the doves. In 2016, the voting regional Feds’ presidents will be: James Bullard (St Louis), Esther George (Kansas City), Loretta Mester (Cleveland) and Eric Rosengren (Boston). We bring some piece of information about these people in the following, and in particular about how they voted over the last years.

James Bullard (president of the St Louis Fed since April 2008, has voted in 2010 and 2013)

  • He has dissented in June 2013 (he wanted the FOMC to signal more clearly its willingness to fight against low inflation).
  • He is one the FOMC members who communicates the most and he is regularly part of the most influential economists in the world (The Economist for instance).
  • Despite his “dissent” in 2013, it remains hard to say whether he is rather a hawk or a dove. For instance, he declared in December that not hiking the fed funds in September was a mistake.
  • He is one the FOMC members giving the most weight to data-dependence and he indicated recently that “pauses” may occur during the normalization of the fed funds policy.

Esther George (president of the Kansas City Fed since October 2011, has voted in 2013)

  • She dissented at all the 2013 FOMCs (as she was “concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations”), except at the December 2013 FOMC (when the FOMC decided to start tapering the QE3).
  • She has been in favour of a fed funds lift-off since the beginning of 2015. She is probably the most hawkish member of the FOMC.

Loretta Mester (president of the Cleveland Fed since June 2014, has never voted)

  • She has never voted at the FOMC.
  • She is likely to be one of the most hawkish FOMC members. She said early in 2015 that she was in favor of an early lift-off (for instance, she said that a lift-off in June was an option). However, she said that her projection for the longer run fed funds (in September) was 3.5%, which corresponds to the median.

Eric Rosengren (president of the Boston Fed since July 2007, has voted in 2007, 2010 and 2013)

  • He has dissented in December 2007 (he wanted a bigger fed funds cut) and in December 2013 (he wanted a later start of the QE3 tapering).
  • He is among the most dovish FOMC members.
  • He has indicated in November that he would like to see the fed funds rising at the pace suggested by the futures contracts (because of the lack of encouraging signals concerning inflation and wages and because of the modest economic growth).
  • He underlined recently that there might be an emerging bubble in the commercial real estate market.

The fact that the new voters may be more hawkish will probably not make a difference

Globally, voting FOMC members are on average slightly less dovish in 2016 than in 2015 but it is unlikely that this would modify the fed funds policy. In reality, it is very common that the presidents of regional Feds are more “hawkish” than the members of the Board. To get more insight about that, let’s analyze the details of FOMC votes on the relatively recent period going from 1990 to 2015, by using the St Louis Fed’s database (Thornton D. et D. Wheelock, 2014, "Making Sens of Dissents : a History of FOMC dissents").

There has been 213 FOMC meetings between 1990 et 2015. Over these 213 FOMC, decisions have been taken unanimously 126 times. For the 87 other FOMCs, at least one of the voting members dissented. All in all, there has been 117 dissents over the period going from 1990 to 2015. 21 out of 117 dissents have been governors’ dissents (while they are far more numerous than presidents of regional Feds) and 96 out of 117 dissents have been presidents of regional Feds’ dissents.

  • 10 out of the 21 governors’ dissents were from governors wanting a tighter policy while 6 out of 21 governors’ dissents were from governors wanting a easier policy (the other dissents were not related to monetary policy issues). The last governor’s dissent asking a tighter policy took place in December 1994 (John LaWare) and the last governor’s dissent asking an easier policy took place in September 2005 (Mark Olson). With very few exceptions, governors vote together.
  • 65 out of 91 presidents’ dissents were from presidents asking a tighter policy while only 13 out of 91 were from presidents asking an easier policy (the other dissents were not related to monetary policy issues). On average, presidents of regional Feds are clearly more hawkish than Board’s members and they show it unambiguously (Lacker, George, Mester).
  • One can almost consider that the president of the New York Fed has the status of governor. Anyway, the presidents of the New York Fed have never dissented since the 1980s.

So, even if presidents of regional Feds (George, Mester, or even Bullard) ask for a quicker rise of the fed funds in 2016, the balance of power is in favour of governors, who are clearly more dovish on average. True, we should expect more dissents asking for more fed funds hikes in 2016 (George, Mester, Bullard) but we have to keep in mind that the governors are the ones who play the pivotal role.

How to interpret the dots?

Currently, 17 people participate to the elaboration of the FOMC’s macroeconomic projections and in particular to the elaboration of the projections for the fed funds (the so called “dots”): the 5 members of the Board of Governors, the president of the New York Fed and the presidents of the 11 other regional Feds. The greatest challenge in interpreting these projections is obviously that they are anonymous, even if some FOMC members unveil their preferences during speeches (for instance, Loretta Mester). Moreover, these projections contain almost as noise as signal. Let us consider an example particularly scrutinized by the markets: the end-2016 dots. 7 out of 17 dots come from non-voting presidents of regional Feds. Moreover, as fed funds decisions are adopted with a majority of at least 6 votes out of 10, one might almost say that less than half of the dots really matter. In fact, the difficulty consists in inferring at which level are located the dots corresponding to the governors.

Among the 17 FOMC members, 4 consider two fed funds hikes in 2016, 3 consider three hikes, 7 consider four hikes, the 3 others considering more. The 3 highest projections for the fed funds are probably attributable to Esther George, Jeffrey Lacker and another president of a regional Fed (Mester?) but not to governors (none of them having said that he/she was in favour of a rapid rise of the fed funds). According to his own declarations, Evans (not voting in 2016) project the fed funds to be at 1% at the end of 2016. This should be also the case of Rosengren (voting in 2016), if we rely on the tone of his speeches. As governors Brainard and Tarullo made very cautious declarations about the monetary policy normalization, one can easily imagine that they currently expect only two hikes in 2016. As far as they are concerned, Janet Yellen and William Dudley have repeatedly insisted on the “gradualness” of the fed funds tightening and may have a projection of 1.25% for the fed funds at the end of 2016. The fact that, as we have just shown, presidents of regional Feds are generally more hawkish than governors (there are of course the exceptions Evans and Rosengren, and until recently Kocherlakota) gives credence to this assumption.

In conclusion, it is very likely that the majority of governors project 2 to 3 fed funds hikes in 2016, and not 4 (as suggested by the median of the projections). However, that is important to consider that the dots have had a limited predictive power for the time being. In December 2014, 15 out of 17 projections envisaged more than one fed funds hike (the median envisaged four hikes).

 

 

The fact that the new voters are more hawkish will probably not make a difference

 

 

 

2016-01-06-01

 

 

 

The greatest challenge in interpreting these projections is obviously that they are anonymous

 

 

 

2016-01-06-02

 

 

 

It is very likely that the majority of governors project 2 to 3 fed funds hikes in 2016, and not 4 (as suggested by the median of the 17 projections)

 

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DRUT Bastien , Fixed Income and FX Strategy
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Some precisions about the FOMC in 2016
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