Fed’s inflation hawks fly the coop

They will be replaced on the Federal Open Market Committee, or FOMC, with members generally viewed as “doves” — more likely to approve of low interest rates and stimulus, and less worried about inflation rising.

“[T]here are no monetary policy hawks who are voting on the FOMC next year,” wrote Deutsche Bank economists in a note previewing the 2015 Fed.

“The composition of next year’s FOMC is significantly more dovish relative to this year, which according to our analysis was pretty centrist,” they concluded.

The shift in the committee’s membership will shape the ongoing debate over when to make the historic decision to raise short-term interest rates from zero, where the Fed has kept them since the financial crisis in 2008 in an effort to boost the economy.

The FOMC, led by Fed Chairwoman Janet Yellen, consists of the other four members of the Fed’s Board of Governors, the president of the Federal Reserve Bank of New York, and four rotating members from among the Fed system’s other 11 regional bank presidents.

At the January meeting, Dallas’ Richard Fisher and Philadelphia’s Charles Plosser, both of whom dissented from the December meeting’s decision on hawkish grounds, will no longer have votes. Fisher, in particular, has consistently and prominently warned of the risks of too-low interest rates during the recession.

Loretta Mester, the new president of the Cleveland Fed, also will rotate off the committee. Although she still has not amassed much of a record, she is perceived as hawkish compared with the rest of the Fed.

On the flip side, the biggest dove in the Fed system, Minneapolis’ Narayana Kocherlakota, also will lose his vote. Kocherlakota dissented in December, arguing that the Fed wasn’t doing enough to push inflation up toward the Fed’s 2 percent goal. In recent months, some measures of inflation have fallen below 1.5 percent and are set to fall even further as energy price drops affect the broader economy.

All four of those members, however, will be replaced by doves or centrists.

Those include Richmond’s Jeffrey Lacker, who has voted against stimulus policies in the past but more recently has said that a lift-off in 2015 is appropriate and that the Fed hasn’t fallen behind in raising rates. The others are centrists or outright doves, including Atlanta’s Dennis Lockhart, Chicago’s Charles Evans and Yellen’s successor at the San Francisco bank, John Williams.

All four members have communicated that they agree with the Fed’s intention of holding off rate increases until around the middle of 2015, depending on how unemployment and inflation shape up.

After the December statement, which said that the Fed would be “patient” in moving toward raising rates, Yellen said the decision wouldn’t come until at least the April meeting. She also indicated that all members thought that rate hikes would occur in 2015.

How much each individual voting member’s opinion matters to Yellen’s decision making remains to be seen.

In her first year as Fed chairwoman, she has developed a reputation as a consensus-builder in close communication with other officials, even though some had pegged her as more of a dove before.

“I feel very listened-to by Janet,” Fisher, president of the Federal Reserve Bank of Dallas, told the Wall Street Journal earlier in the year.

Nevertheless, she has made it clear that she does not insist on unanimity in making big decisions.

“At a time like this, where we are making consequential decisions, I think it’s very reasonable to see divergences of opinion,” Yellen said of the three dissents in December at the post-meeting press conference.

Nevertheless, the more dovish tilt could translate into a later meeting for the expected rate hikes or slower ensuing increases in interest rates.

In particular, Williams told Businessweek in December that “we need progress on unemployment, progress on wage growth and progress on inflation.”