Originally posted at Briefing.com
It is fair to say that the decisions made (and not made) by the Federal Open Market Committee (FOMC) have a tremendous influence on the behavior of the capital markets. Even though the FOMC is charged with adopting monetary policy that achieves maximum employment and price stability for the U.S., its policy design reverberates around the globe given that the U.S. dollar is the world's primary reserve currency, a peg for other currencies, and the predominant currency used in global trade.
Accordingly, the FOMC faces an overwhelming responsibility in setting its monetary policy — a responsibility some people think it abdicated with the implementation of quantitative easing and the expansion of its balance sheet to $4.4 trillion, which is one-fourth the size of the U.S. economy.
It's no small consideration then when the FOMC decides to make a change in its monetary policy. In the same vein, it's no small consideration when the composition of the FOMC changes, as it will soon do with the arrival of new voting members in 2015.
Today we will take a look at who's who on the 2015 FOMC, which could arguably be the most important FOMC group in the Fed's history given the burgeoning expectations that the fed funds rate will be moving off the zero bound where it has resided for the past six years (six years!!).
A Little Background
When it is at full capacity, there are twelve voting members on the FOMC: the seven members of the Board of Governors and five of the twelve Federal Reserve Bank presidents.
The president of the Federal Reserve Bank of New York has a permanent vote on the committee, so the remaining four presidents with a vote rotate annually. They serve one-year terms beginning on January 1 of each year. Other Federal Reserve bank presidents attend the FOMC meetings and contribute to the discussions, but they do not cast a vote for setting policy.
The members of the Board of Governors are nominated by the President of the United States and are confirmed by the Senate. There are currently two vacancies on the Board of Governors. Consequently, there are only ten voting members on the FOMC at the moment.
The 2014 voters are: Janet Yellen (Board of Governors, Chair), Stanley Fischer (Board of Governors, Vice Chair), Lael Brainard (Board of Governors), Jerome H. Powell (Board of Governors), Daniel Tarullo (Board of Governors), New York Fed President William Dudley, Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota, Cleveland Fed President Loretta Mester, and Philadelphia Fed President Charles Plosser.
Naming Names
The 2014 FOMC walked a dovish line, although there were some vocal hawks on the committee. Dallas Fed President Fisher and Philadelphia Fed President Plosser, both of whom announced plans to retire during the year, were the most prominent ones in that regard.
Cleveland Fed President Loretta Mester arrived late to the party, taking over June 1 for Sandra Pianalto who retired from her post at the end of May. In her short stint, though, Ms. Mester was looked upon as having a more hawkish orientation.
The Fed Governors all skew to the dovish side of things with the exception perhaps of Jerome Powell who is regarded as more of a centrist.
The last scheduled vote for the 2014 FOMC will take place on December 17, 2014. There is no doubt that the majority will be in favor of keeping the fed funds rate at the zero bound.
Come January 1, 2015, the new slate of voting bank presidents will include Atlanta Fed President Dennis Lockhart, Chicago Fed President Charles Evans, Richmond Fed President Jeffrey Lacker, and San Francisco Fed President John Williams. The skinny on each is as follows:
Dennis Lockhart
Said in a speech on December 8 that the current momentum in the U.S. economy makes interest rate liftoff likely in mid-year 2015 or later. However, knowing what he knows today, he said that patience regarding timing liftoff and a cautious bias regarding the subsequent pace of rate moves is a sensible approach to policy. He added that he didn't see the risks of a patient approach as excessive.
Mr. Lockhart will be viewed as dovish given the concerns he has about the Fed moving too early and the allowance he is giving for the first hike possibly coming later than mid-2015.
Charles Evans
In a Q&A session with The New York Times on December 3, he noted his concerns about low inflation and said he thinks "appropriate monetary policy would keep the fed funds rate where it is until the first quarter of 2016."
Mr. Evans will be cast as the biggest dove on the committee.
Jeffrey Lacker
Regular market watchers will recall that Jeffrey Lacker cast a dissenting vote at every FOMC meeting in 2012 when he last served on the committee. His objections to monetary policy over the course of that year were tied to his belief that economic conditions would not likely warrant exceptionally low levels of the federal funds rate through late 2014 as well as his opposition to additional asset purchases.
Mr. Lacker will be cast as the hawk on the 2015 FOMC, yet it's probably more appropriate to label him a centrist given the acknowledgment he made this past August that he didn't think the Fed was behind the curve in pulling back on its policy support. He also told Bloomberg Radio in an October 31 interview that he thought inflation would trend back toward 2.0% over the next year or two.
John Williams
Told The Wall Street Journal on October 19 that his baseline forecast is around full employment and around 2% inflation by 2016, which implies rate increases in the fed funds target range starting sometime in 2015. He added that his thinking about the appropriate timing for a rate increase would be affected if the forecast for growth and/or inflation over the medium-term shifted significantly for the worse.
Mr. Williams is generally regarded as a dovish-leaning member, yet he strikes us as more of a centrist.
What It All Means
On balance, the 2015 FOMC will have a slightly softer side to it than the 2014 FOMC did since there aren't any clear-cut hawks coming to the table like there was with Mr. Fisher and Mr. Plosser who made noise about needing to raise rates sooner rather than later.
That's not to say a rate hike in 2015 is out of the question, yet with more dovish-leaning members entering the voting mix, we'd argue that the 2015 FOMC may be more conservative about the timing of the first rate hike than the 2014 FOMC might have been if those same committee members had a vote in 2015.
That could be potentially good news for the stock market, which has savored for six years now the thought of the FOMC standing pat at the zero bound.
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