This year's Federal Open Market Committee (FOMC), which meets for the first time this week, faces many unknowns, including new faces at the Fed. In fact, by year's end, the Fed's rate-setting body will have, at most, only two continuity voters — that is, members who voted during all of 2017 and will vote throughout 2018.
Only twice before in its history has the FOMC had so few continuity voters across two consecutive years: in 1987 and in 2007. On the first occasion, the Fed had to deal with a major stock market crash, while on the second it was confronted by the decline in the subprime market that heralded the 2008 Financial Crisis. These are only two data points to be sure, but the point is that a relatively inexperienced FOMC may find itself having to cope with situations that would pose a challenge even to the Fed's most seasoned veterans.
Continuity FOMC Voters
This week's FOMC meeting will be Janet Yellen's last vote. Yellen will step down from the Federal Reserve Board on February 3, when her term as Chair expires, though she could have remained a Governor until 2024. Jerome "Jay" Powell, Yellen's colleague on the Board, will succeed her, having been confirmed by the full Senate last Tuesday.
Powell is one of those two continuity votes on the FOMC this year, having voted at all of last year's FOMC meetings. He's expected to lead the Fed by hewing closely to Yellen's example. As I previously noted, he will likely continue the normalization plan developed under Yellen — with its gradual path for rates increases and monthly reductions of the balance sheet. However, should deviations from the plan become necessary, Powell's limited background in monetary economics and track record for relying on his staff and his FOMC colleagues suggest that he would work to maintain policy consensus.
Governor Lael Brainard, who has served on the Board since 2014, will join Powell as the only other continuity voter. She has previously been skeptical of removing monetary accommodation and raising interest rates, yet has never dissented in an FOMC vote. Despite her dovish reputation, she is very likely to support Powell's leadership and policy decisions. Fed Governors have supported the Chair on FOMC decisions without exception for more than a decade. The last Governor's dissent — when Mark W. Olson wanted an easier policy — was in 2005. Conversely, regional bank presidents have dissented 70 times since then.
New Faces at the Board of Governors
The most recently appointed Governor, Randal Quarles, voted only twice last year. Quarles came to the Fed with a background in private equity (he and Powell were both partners at the same private equity firm, The Carlyle Group). As Vice Chair of Supervision, it is widely believed that Quarles will focus more on his regulatory portfolio than staking out new ground in monetary policy. Recent comments indicate he'll be determining how much of a burden current regulations impose, using a cost-benefit approach that Powell supports. But he has gone further than Powell in proposing regulatory relief for any large financial institution that does not impose systemic risk.
The Board of Governors is a 7-member body. So, with Yellen stepping down and Stanley Fischer having left the post of Vice Chair in October, four vacancies have yet to be filled. Yet so far the president has put forward but one nominee: Marvin Goodfriend.
Though he didn't escape criticism at last week's Senate Banking confirmation hearing, Goodfriend's longstanding academic record of thinking about experimental monetary policy, as well has his considerable experience as a policy advisor at the Richmond Fed, would make him a valuable asset to the Board, and to the FOMC.
For example, Goodfriend was writing about how to overcome the zero lower bound in 2000, when the federal funds rate was 6.5%. And more than a decade ago he was writing on the utility of using interest on reserves as a tool for implementing monetary policy. My colleague George Selgin has questioned the Fed's IOER-based "floor" system, suggesting that it harbors an inherent deflationary bias, among other shortcomings. Yet, it is desirable to have a permanent FOMC voter who has spent more than a decade thinking about the unconventional operating framework that the Fed is currently using.
And the other vacancies? While no names have circulated as potential Governors, several potential Vice Chair nominees have been mentioned. Those include Mohamed El-Erian, former CEO at PIMCO and economist at the IMF who currently serves at the chief economic adviser at Allianz; Larry Lindsey, a former Fed Governor and current CEO of the Lindsey Group, an economic consultancy; and Richard Clarida, the Global Strategic Advisor and a Managing Director at PIMCO and the C. Lowell Harriss Professor of Economics at Columbia University.
The most recent name reported is John Williams, President of the San Francisco Fed; incidentally, the same position Janet Yellen held before she moved to Washington to be Vice Chair under Ben Bernanke.
While Williams is eminently qualified for the role, his selection would be a curious one for the administration, if they intend to shake up the Fed, as it would dampen their overall impact on staffing officials in the Federal Reserve System. Williams is a 2018 FOMC voter. He is eligible to serve as SF Fed President through June 2027 — giving him a vote on the FOMC four years out of the next ten, since the SF Fed President sits on the FOMC every third year. Promoting him to Vice Chair would turn him into an annual FOMC voter (in addition to elevating him to the Board, of course), but the administration would have no direct say in who replaces him at the San Francisco Fed. Regional bank presidents are selected by that regional bank's Class B and Class C Directors, not by executive nomination and are not subject to Senate confirmation.
Rotating Regional FOMC Voters
Each year, five Federal Reserve regional bank presidents vote on the FOMC: four rotate annually while the President of the New York Fed is a permanent voter. San Francisco has a seat on the FOMC in 2018, so Williams votes this year — with or without the Vice Chair promotion.
Unlike some of the regional bank presidents rolling off the FOMC, Williams is open to accelerating the path of rates hikes. He will be joined by Loretta Mester — who, as the President of the Federal Reserve Bank of Cleveland, votes every other year, rather than every third. Mester has been one of the most aggressive voices for a steeper path of rates hikes, having dissented twice in 2016, when she felt the Fed ought to be raising rates faster.
Mester and Williams are stark contrasts to two of last year's voters. Recall that in December, Charles Evans, President of the Chicago Fed, joined Neel Kashkari in dissent, preferring to hold rates steady. Kashkari, President of the Minneapolis Fed, had already dissented during the other two rates hikes of 2017, preferring to maintain monetary accommodation in light of low inflation numbers.
But the major question marks are with the two most recently appointed regional bank presidents. They are both FOMC voters this year and between them there have been only five speeches.
Rafael Bostic took over leadership at the Atlanta Fed in June of last year. He's been a public policy professor at the University of Southern California, an Assistant Secretary at the Department of Housing and Urban Affairs, and an economist at the Federal Reserve Board. In his only speech of the year thus far, he broadly underscored the normalization framework in place, though he sees different risks to the economy than his colleagues Williams and Mester. Where they see potential upside risk that may hasten rates hikes, Bostic believes that monetary policy is already "approaching a more neutral stance" and he is open to fewer than three hikes, as he believes the Fed will achieve its 2% inflation target by year's end.
Thomas Barkin, starting just this month as President of the Richmond Fed, is even more of an unknown quantity. He is not totally new to the Federal Reserve System, having sat on the Atlanta Fed's Board of Directors for six years, serving as Chairman for two. He was a senior partner and the chief risk officer at the consulting firm McKinsey & Company, which makes him a sensible choice for running the Richmond Fed as CEO. But these experiences shed no light on his views on monetary policy. His first speech will be read with great interest.
Vice Chair of the FOMC
A final source of FOMC uncertainty is the anticipated change in the leadership of the New York Fed. President William Dudley announced he will be stepping down this summer, rather than next January when his term ends. Dudley, who as NY Fed President is the Vice Chair of the FOMC, is currently the longest tenured FOMC voter. The search for Dudley's replacement is already underway in earnest, and will be selected without direct input from the administration. But, whoever takes over for Dudley this summer will immediately and permanently vote on the FOMC throughout his or her tenure as NY Fed President.
Changes have already happened and more are coming to the Fed in 2018. As Powell takes the helm and Yellen's normalization plan continues, uncertainties remain. With much still unknown about the 2018 Federal Open Market Committee, let us hope we learn more about the voters' views long before we learn about how they respond to a crisis.