Janet Yellen’s long run of unity on the Federal Reserve’s monetary policy committee may be at an end.
Recent public statements by the nine other voters who will be weighing whether or not to raise rates at this week’s meeting suggest that the chairwoman is likely to face dissent whichever way she leans.
Over the past 11 months, since the Fed ended its large-scale bond purchases, there has been a relative peace between the “doves” and the “hawks” at the central bank, that is, between those who generally favor more easing and are less worried about inflation and those who are concerned that too-low interest rates could lead to out-of-control inflation.
But that period is drawing to a close as the the Fed’s policy of keeping its short-term interest rate target near zero stretches toward its eighth year. There is little agreement among Fed officials about when to raise rates, presaging arguments in the years ahead about how quickly to tighten monetary policy in response to an economic recovery that still has not accelerated to the point of clearly convincing officials that easy money is no longer necessary.
The minutes from the Fed’s July meeting sum up the divide: According to the summary of the discussions, some of the officials say the Fed should act based on the cumulative improvement in the economy since the recession. With the unemployment rate having fallen from a crisis level of 10 percent to 5.1 percent in August, crisis-era zero rates are no longer appropriate.
But other officials are worried that the Fed still isn’t closer to meeting the other side of its mandate, keeping inflation stable. They “cited downside risks to inflation, pointing to the absence of any noticeable response of inflation to the reduction in resource slack over the past several years, risks of further declines in oil and commodity prices, and the possibility of further appreciation in the dollar.”
If the committee announces no increase in its rate target Thursday, the most likely dissent on the “hawk” side would be from Jeffrey Lacker, the president of the Federal Reserve of Richmond.
Earlier this month, Lacker dedicated a speech to building a case against further delay in raising rates, arguing that waiting too long could force the Fed to scramble to contain inflation later on.
Lacker has demonstrated a readiness to vote against the majority in the past. Throughout 2012, he voted against then-Chairman Ben Bernanke’s moves to start a new round of open-ended large-scale bond purchases, a program known as QE3.
The minutes from the July meeting also suggest that Lacker wanted to raise rates at that time, but was willing to hold off until another meeting for confirmation of the incoming economic data. Officials are not identified by name in the minutes, however, making it impossible to confirm.
On the other hand, if the majority does decide to raise rates, the most likely dove to dissent would be Charles Evans, president of the Chicago Fed.
In his most recent comments on monetary policy, in May, Evans said that, when it comes to raising rates, “there are uncertainty reasons to sort of make you say, ‘Why should you be in a rush to do this?'”
Arguably, uncertainty has risen in the intervening months, as concerns about growth in China and high volatility in U.S. markets have risen.
Evans also has a track record of dissent. He issued the first two dovish dissents of the post-crisis era in late 2011, arguing that the Fed needed to be adding more stimulus. He was the intellectual architect of the Fed’s later move to tie its stimulus efforts to specific unemployment goals.
Other members of the voting committee have done less to tip their hands.
Dennis Lockhart, president of the Atlanta Fed, suggested in August that he had seen enough growth in economic output and jobs to support a rate hike, regardless of incoming economic data. But after the stock markets began to experience wild swings in September, he moderated his comments to make it sound as though he could vote for a decision to not raise rates.
The least likely possibility is that of a dissent from one of the four members of the Federal Reserve Board of Governors beside Yellen.
Those voting members, who share staff with Yellen, generally vote with the chairwoman. The last time a governor dissented was in September 2005, when Mark Olson thought that the committee should postpone a rate increase because of the possible economic fallout from Hurricane Katrina’s devastation of New Orleans.
