Janet Yellen, President Obama's nominee for Federal Reserve chairman, is generally viewed as a “dove” — someone who, all else equal, prefers looser money and tolerates slightly higher inflation.
But even if Yellen is confirmed and in charge of the Fed by January, signs point to the central bank becoming overall more “hawkish” in 2014, no matter what the first female chairman’s underlying beliefs and instincts may be.
That’s because the composition of the Federal Open Market Committee, the group that determines monetary policy, will undergo a significant overhaul, one that will leave it with more inflation hawks than it has had in recent years.
That means that the group making the decision of when and by how much to slow the central bank’s $85 billion in monthly bond purchases will, on balance, be more skeptical of that program than the current members of the committee. Most analysts expect the Fed to begin considering “tapering” its asset purchases sometime next spring.
Every year, four of the 12 regional Federal Reserve bank presidents rotate off the 12-member FOMC, and four new members join. There's only one consistent hawk among the bank presidents currently on the board: Kansas City's Esther George, who has voted against current Chairman Ben Bernanke's resolutions in recent meetings out of fear that his program will lead to rising inflation.
Yellen, who as the Fed’s vice chair since 2010 has been a key proponent of Bernanke’s stimulus programs, could see that one “no” vote become two or three in 2014.
Even though hawks will not constitute a majority, they could pressure the committee to tighten money. In a recent research note, Deutsche Bank economist Joseph LaVorgna wrote that “at the margin, monetary policy will be less dovish than it has been even though the person that is replacing Chairman Bernanke has very similar views on monetary policy.” Yellen herself might move toward the center “in order to forge a consensus among potentially fractured policymakers,” LaVorgna suggested.
One incoming member, Philadelphia’s Charles Plosser, is known as a critic of loose-money policies and called this month for an “expeditious phase-out” of the Fed’s bond-buying, or quantitative easing, programs.
Another president who will get a vote next year, Dallas' Richard Fisher, told Reuters in an interview following Yellen's nomination that he was “uber-hawkish,” and said, “I expect that we will disagree going forward.” Despite his disagreements with her over policy, Fisher is good friends with Yellen and called her a “good egg.”
The other two new voting members’ preferences are slightly harder to project.
One, Minnesota’s Narayana Kocherlakota, was once one of the most hawkish Fed officials, voting as a member of the FOMC in 2011 against Bernanke’s efforts to signal that money would be kept looser for longer. Since then, however, Kocherlakota, partly through Bernanke’s influence, has become the biggest dove, calling in recent months for the Fed to increase, rather than slow down, its stimulus purchases.
The other will be the president of the Cleveland bank. It’s not yet known who will be chosen for that position, although usually the Cleveland Fed president is relatively hawkish.
The net effect of the new voting members will be that the program of quantitative easing and guarantees of near-zero interest rates set in motion by Bernanke will be viewed more skeptically.
Another factor in changing the composition of the FOMC will be the departure of many of the Fed’s seven-member Board of Governors, who are permanent FOMC voters.
There’s already one vacancy on the board, as Governor Elizabeth Duke left earlier this fall. Yellen’s old spot will have to be filled. Sarah Bloom Raskin is leaving to take a job in the Treasury Department. Jerome Powell’s term expires in January.
Because governors usually vote with the chairman, the vacancies could shift the center of the committee away from Yellen and toward the hawks. In the past, Obama has been slow to get new governors confirmed.
Some economists familiar with Bernanke’s academic work on the Great Depression and Japan’s “lost decade” in the 1990s, in which the former Princeton professor advocated super-aggressive monetary accommodation, think that Bernanke similarly may have moderated his prescriptions to accommodate diverse views on the FOMC.
Nevertheless, the Fed chairman has wide latitude to shape the decisions of the Fed even when he or she doesn’t enjoy a strong majority, said Joseph Gagnon, a researcher for the Peterson Institute for International Economics and a former Federal Reserve Board official.
“You can’t stop people from saying what they think” at the Fed’s meetings, Gagnon told the Washington Examiner. “But the chairman gets to craft the statement” that determines policy, limiting others’ input.
Gagnon also speculated that Yellen might put less of a priority on minimizing dissent than Bernanke did. Even though she may face two or three dissents at a given meeting rather than one, Gagnon said, “it comes down to those who have strong views and those who don’t” to shape the course of the country’s monetary policy.