Is This What The Long-Term 'Nominal' Stock Market Bulls Are Banking On?
The Fed is set to become considerably more dovish in 2013 and beyond as Evans and Rosengren become voting members. It seems unlikely that any new 'Bernanke' would drastically alter the Fed's path; and so we present the 'Doves' path to prosperity (in nominal terms).
'v' is for voting members...
Chart: adapted from Barclays
The rise of the doves means Fed policy should stay easy even if the data continue to show improvement.
Over the past several weeks, the markets have focused on who might succeed Chairman Bernanke once his term as Fed Chair expires in January 2014. With President Obama winning re-election, we expect continuity in Fed policy in 2014. Meanwhile, as the end of the year approaches it is worth noting that the 2013 FOMC could be one of the most dovish in some time. Thus, market participants should be careful not to price out further Fed easing on somewhat better data.
Doves rule the nest
Four of the five voting positions on the FOMC rotate among the regional Fed presidents. The president of the New York Fed is a permanent voter, by virtue of being the ex officio vice chair of the FOMC. Current New York Fed President Bill Dudley skews to the dovish side. He will be joined in 2013 by two über-doves: Chicago’s Charles Evans and Boston’s Eric Rosengren. Evans was an early proponent of quantitative “thresholds” for interest rate policy; recently, other Fed officials (such as Rosengren) have supported that approach for asset purchases as well. These two also favor focusing on achieving a substantial labor market improvement, which portends easy policy throughout 2013.
Joining Evans and Rosengren are two presidents to the hawkish side of the spectrum: St. Louis’s James Bullard and Kansas City’s Esther George. Note that we know a lot about Bullard’s views, as he speaks regularly; George has given very few speeches to the national press and so her perspectives on monetary policy remain a bit of a mystery. Bullard is interesting because he was an early advocate of taking a flexible approach to the balance sheet — but may not support further expansion under current economic conditions. He has long opposed putting much emphasis on forward guidance. Neither is likely to be quite as hawkish as Lacker this year, or Fisher and Plosser the year before, but one or both may dissent more often than not. But they will remain a distinct minority.
A gaggle of governors
The governors also retain a dovish bent, as Bernanke and Yellen have recently been joined by Jeremy Stein, a fellow academic who supports further Fed support for the economy. The remaining Governors have backgrounds in something other than economics. Daniel Tarullo and Sarah Bloom Raskin have consistently supported the majority; to date, so too has recent appointee Jerome Powell.
The 14-year appointment of the seventh Governor, Besty Duke, ended early this year. She has stayed on to allow the Fed to operate with at least five Governors since the start of 2012. President Obama is now likely to appoint a replacement next year. Moreover, should Chairman Bernanke decide to retire, President Obama would fill a second position in his second term. Two appointees in a four-year presidential term is actually fairly low historically. Bernanke and Duke are the last Governors not appointed by Obama, but most presidents have appointed a majority of Governors during their term in office. Yet as the Fed now places more emphasis on forward guidance, long-term targets, and communications, the impact of these appointments may persist beyond 2016.
More immediately, the doves largely support the idea that policy should be kept easy “for a considerable time” after the recovery is underway. Market participants thus should be cautious not to overreact to better near-term data: the Fed isn’t likely to turn notably more hawkish any time soon.