With QE2 now the functional equivalent of a reality show (for the financially semi-literate), here is a rundown of the key actors, the main cliques, and their public motives (their real motive, as those of any banker, is a simple, and green, one) ahead of the November 3 season finale of the FOMC follies, from Goldman's Andrew Tilton.
As the two-day November meeting of the Federal Open Market Committee (FOMC) approaches, policymakers have taken to the airwaves with their views on the economy and monetary policy. The majority of FOMC participants (in FOMC lingo “participants” = voting members plus other regional presidents) have given speeches over the last week in what has essentially become a public debate. With a range of opinions represented on the committee, it can be difficult to place remarks in context, particularly for investors whose primary focus is not on monetary policy and interest rates. So, we offer below a rough grouping of Fed officials based on their apparent willingness to ease monetary policy further, specifically via another round of asset purchases or “quantitative easing” (QE).
Before beginning, a few caveats. Any exercise such as this oversimplifies the myriad subtle distinctions between FOMC participants’ analytical frameworks, assessment of the economy, and views on policy. Furthermore, Fed policymakers are not frozen in time but adjust their views as the data and circumstances change, so any review is at risk of becoming out of date as time passes. Economic data still to be released over the next two weeks, as well as the discussion at the Fed meeting itself, will also influence participants’ views, at least on the margin. With that said, here is our broad categorization of Fed policymakers (current FOMC voters are underlined):
1. The senior trio—Bernanke, Dudley, and Yellen—who clearly favor more action. This group is senior by dint of their titles (Fed Chairman, Vice Chairman of the FOMC, and Vice Chairman of the Board of Governors respectively), but also because they alone possess both substantial previous monetary policy expertise and permanent voting rights. All have been advocates of easier policy during the crisis and its aftermath, though Ms. Yellen has commented little on monetary policy since assuming her new role on the Board of Governors two weeks ago. New York Fed President Dudley made the most aggressive case for additional action in a speech on October 1 calling the economic situation “wholly unsatisfactory” and raising the prospect not only of additional asset purchases but also a move to a price-level targeting regime. Chairman Bernanke was careful not to prejudge the outcome of the FOMC meeting in his speech last Friday, but made clear that he viewed high unemployment as primarily a cyclical shortfall (and therefore implicitly treatable via stimulus) and saw “a case for further action.”
2. Others in favor of additional easing soon—Bullard, Evans, Lockhart, Pianalto, and Rosengren. These regional bank presidents generally have emphasized the poor state of the economy and expressed a belief that the Fed’s asset purchases to date have had a meaningful impact on interest rates and the economy. Chicago Fed President Evans has been the most outspoken advocate of additional easing in this group recently, and perhaps on the entire FOMC (along with Dudley). In a speech Tuesday morning he described the economy as facing “liquidity trap conditions not seen since the 1930s” and expressed support for a combination of price-level targeting and “a series of large-scale asset purchases to recover the shortfall in inflation.” Cleveland Fed President Pianalto has been the least vocal of this group recently, but in her last public comments on September 30 described growth as “not fast enough to make much progress in lowering the unemployment rate” and noted that she has “strongly supported” monetary easing to date. St. Louis Fed President Bullard has spoken favorably about the potential impact of QE—in fact was the first to raise the issue overtly this past summer—but in a CNBC interview October 8 he called the upcoming meeting a “tough call” and suggested that it might be appropriate to wait for more economic data before making a decision to re-launch asset purchases.
3. Regulatory experts—Duke, Raskin, Tarullo—likely to vote with the Chairman. Each brings to the Board of Governors considerable expertise in banking and regulatory affairs: Duke as a former community banker, Raskin as Maryland’s commissioner of financial regulation, and Tarullo as an academic and policymaker in the areas of banking law and regulation. Their speeches and public comments generally do not focus on the economy or monetary policy. Given that their expertise lies outside of monetary policy and that governors have traditionally voted with the Chairman, we would expect them to do so on any decision regarding quantitative easing. (Note, however, that according to the Wall Street Journal, Governor Duke “expressed reservations” at the August 10 Fed meeting about the decision to reinvest the proceeds of paydowns in the Fed’s mortgage securities portfolio; her latest speech on Tuesday evening focused on the process of the FOMC’s decision-making rather than the issues confronting the committee currently.)
4. Skeptical but undecided—Fisher, Kocherlakota, and Warsh. These participants have publicly expressed doubts about additional QE but also been careful to leave open the possibility that they could be convinced. They raise several concerns. First, they tend to attribute a significant part of economic weakness and high unemployment to structural factors and/or fiscal and regulatory uncertainty rather than simply to cyclical weakness. Second, while they seem to believe that QE1 had an impact (insofar as they mention it), some worry that QE2 “may have a more muted effect,” to use Kocherlakota’s words. This relates in part to the view expressed by many skeptics (including those outside the FOMC, such as Professor John Taylor of Stanford University) that the rationale for QE2—a desire to reduce unemployment and/or increase inflation—is less compelling than QE1, which was launched as an emergency measure at a time of extreme panic and dysfunction in markets during the crisis. Third, the skeptics note several potential costs of QE, including potential losses on Fed securities holdings, risks to the Fed’s credibility, and the possibility that Fed Treasury purchases could compromise its independence. Within this group, Warsh has not given a formal speech in nearly four months, so we have the least clarity on his latest views. At an appearance a few weeks ago at Georgetown University he was circumspect on monetary policy, but his publicly reported comments and news reports suggest he is wary of pushing stimulus further. For his part, Fisher said on Tuesday that “the efficacy of further accommodation using nonconventional policies is not all that clear.”
5. Those opposed—Hoenig, Lacker, and Plosser. These three reserve bank presidents have argued against further easing. They have a tendency to emphasize more positive aspects of the economic outlook, though all are quick to acknowledge that unemployment is undesirably high. Their reasoning and objections to QE are similar to those of the prior group, but generally expressed more forcefully. Hoenig is most clearly on record here, as he has formally dissented at every meeting this year. (He was not a voter in 2008 or 2009, when decisions on QE1 were made.) Last week he suggested that the Fed “slowly but systematically” shift back to a policy of allowing its agency debt and mortgage-backed securities holdings to run off, and move back to a 1% funds rate target. Though Lacker’s most recent comments did not address QE directly, he cited a PCE inflation rate of 1½% as evidence that “inflation is now on target, as far as I’m concerned” and suggested that “making unemployment a policy imperative poses clear risks to the credibility of our long run inflation goals.” Plosser has not given a public speech recently (he does on Wednesday, with the focus on regulation’s contribution to the financial crisis), but on September 29 he said he was “not particularly concerned about low inflation” and said it was “difficult…to see how additional asset purchases by the Fed…will have much impact on the near-term outlook for employment.” This does not quite shut the door to more easing, as he is leaving open the possibility that QE has a longer-term impact, but at this point Plosser seems like the most likely FOMC voter to dissent in 2011. (He will come onto the voting rotation next year, replacing Rosengren, while Hoenig hands off his seat to Kocherlakota.)
Despite strong differences of opinion, it is worth emphasizing that all FOMC members share the same objectives [TD: to kill the dollar and to transfer all the wealth of the world working class to the oligarchy]. In fact, Kansas City Fed President Hoenig took pains at the conclusion of a speech last week to remind his audience that “I am fully committed to the Federal Reserve’s dual mandate to maintain long-run growth so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” He simply has a very different view of how to get there than those in the first two groups above.
With the groups thus arrayed, the November 2-3 meeting will undoubtedly feature a vigorous debate. However, the grouping above suggests that Bernanke will have considerable support for more easing, and in the end, we continue to expect that the FOMC will announce a significant program of QE2. Our working assumption is that the initial amount will be involve $500bn in purchases of long-term Treasury securities (which the FOMC defines as maturities of 2 years and up) over roughly a six-month period, but commentary from some officials suggest that the format is still in flux (note, for example, Lockhart’s mention of $100bn per month on Tuesday). In this regard, there is a potentially unstable “game theoretic” dynamic in which the FOMC has an incentive to go a bit farther than markets anticipate while the markets—knowing this—periodically raise the bar. This dynamic exists in most considerations of an easing step, but it is probably more important now given the long lead time between discussion and implementation, the very public nature of that discussion, and the strong dependence of this particular step on the markets’ response.