In his nearly six years on the Federal Reserve’s board of governors before becoming its chair, Jerome Powell never once cast a dissenting vote on monetary policy.
That doesn’t mean he always agreed. His concerns about the U.S. central bank’s continued asset purchases after the 2007-2009 recession, which were shared by two other Fed governors, helped force a policy turn in 2013 that compelled it to start reducing its massive holdings of bonds despite then-Chair Ben Bernanke’s misgivings.
Now it is Powell, the Fed chief since 2018, who is feeling the heat and, like Bernanke, has to try and shape consensus as policymakers approach yet another critical turning point: when and how to start withdrawing the extraordinary stimulus they put in place to shield the economy from the COVID-19 pandemic.
In recent days, a steady drumbeat of Fed officials have offered competing timelines about when to start tapering the Fed’s $120 billion in monthly purchases of Treasuries and mortgage-backed securities amid surging inflation and strong job gains.
Discord among the core group of the Federal Open Market Committee’s permanent voting members, who are typically more reticent to voice firm views, has also sprung out into public, a sure sign of intense debate behind closed doors.
For his part, Powell, has said the Fed is “a ways off” from meeting the “substantial further progress” threshold that was to set in motion the start of the bond-buying taper. He has also repeatedly said he thinks high inflation readings are temporary.
Data on Wednesday showed U.S. consumer price gains slowed in July even as they remained at a 13-year high on a yearly basis amid tentative signs inflation has peaked.
The Fed has long been a “consensus” body which derives much of its credibility from policy actions that for decades have been overwhelmingly backed by voting members. Formal dissents occur - three regional Fed presidents dissented in 2019 - but in the last quarter of a century only two Fed governors have done so. The last time was in 2005.
Still, even “the threat of dissent is powerful,” said Narayana Kocherlakota, a University of Rochester economics professor who dissented a number of times while he was president of the Minneapolis Fed from 2009 to 2015.
“If you were a voter, there was an attempt made to stretch what the committee was putting together in order for everybody to go along with it ... the chairs I worked under preferred not to have dissents.”
SMALL DIFFERENCES ADD UP
The stakes for Powell could not be higher, with both his legacy and future as Fed chief at issue.
Under his tenure, the Fed established a new monetary policy framework that places an emphasis on the central bank’s employment goal and greater flexibility on its inflation mandate.
Now Powell has the arduous task of making sure he and his colleagues hold true to that commitment in the face of what are, to some of them, uncomfortably high inflation readings.
What policy action is taken, and how successfully Powell shapes it, may also prove a key test for whether President Joe Biden opts to reappoint the former investment banker for a second term as Fed chief.
On one level, the debate at hand appears to be about small differences: whether, as Fed Governor Christopher Waller proposed last week, to respond to strong jobs growth with a bond-buying taper announcement next month, or to wait, as Governor Lael Brainard would prefer, at least until the Fed’s Nov. 2-3 policy meeting.
There is also the question of whether, as St. Louis Fed President James Bullard would like, to get the reductions over and done with more rapidly, or, as Dallas Fed President Robert Kaplan wants, to do them more gradually.
But the differences add up, said Randall Kroszner, a professor at the University of Chicago Booth School of Business who was a Fed governor from 2006 to 2009.
“It’s all part of a broader forecast,” Kroszner said. “If people see the economy coming back more strongly and more inflation pressures, they are going to want to taper sooner and more vigorously and raise (interest) rates early.”
Last week may have been a warning sign that the mood among some policymakers at the Fed is shifting. Fed Vice Chair Richard Clarida, the second-in-command, expressed more worry than Powell about the prospect of persistently high inflation and offered, for the first time, a precise timeline of early 2023 for when he thinks the central bank should begin raising rates.
“It is surprising to us that a core member of the (committee) would set out a potential timeline for policy,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
DEBATE SWAYING POLICY
The rising tide of policymakers who appear more comfortable with a quicker timeline for tapering and possibly raising the Fed’s benchmark overnight interest rate from its near-zero level could force Powell to act sooner rather than later to keep the core of the committee onside.
If so, it would be history repeating. In 2013, Powell and two other would-be dissenters on the Fed board - Elizabeth Duke and Jeremy Stein - worried that markets were beginning to believe the Fed would keep buying bonds forever. They worked to persuade Bernanke that he needed to start talking more openly about tapering the program.
It worked, with none of the three casting a dissenting vote. “I told them that while my view on securities purchases differed from theirs, I would do my best to accommodate their preferences. ‘My position as Chairman is untenable if I don’t have the support of the Board,’ I told them,” Bernanke recounted in his memoir.
The Fed will hold policy meetings in September and December in addition to the one in November. Later this month, Powell is also due to give a speech to the annual Jackson Hole central banking conference in Wyoming. The event has often been a setting for the guiding of policy expectations.
What is clear is that with a policy committee tilting toward growing impatience to begin dialing back its stimulus, Powell will be pressed to forge a compromise to avoid dissents.
“I think the (committee) is at its best when we have debate and disagreement,” Kaplan said about the recent jostling in public, adding that it was “far more likely” to lead to better policy decisions.
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