Updated: 11-27-2015

Out with the old and in with the new.  It happens every year with the Federal Open Market Committee (FOMC) and the regional bank presidents who have a vote on that committee. The turnover occurs January 1; and it's important to know who the new voters will be since their policy views will go a long way toward shaping the outlook for the global economy and the capital markets.

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.

As an aside, President Obama has nominated Allan Landon and Kathryn Dominguez to fill the two vacancies on the Board of Governors, yet neither has had a confirmation hearing yet.

The 2015 FOMC 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, Atlanta Fed President Dennis Lockhart, Chicago Fed President Charles Evans, Richmond Fed President Jeffrey Lacker, and San Francisco Fed President John Williams.

The 2015 FOMC has been a divisive group for the capital markets given its flawed communication efforts.  Moreover, individual members have shared disparate views that have left market participants feeling confused about when the FOMC will ultimately raise the target range for the federal funds rate for the first time since June 2006.

Welcome Aboard

Thus far, the 2015 FOMC has held the line on the fed funds rate at the zero bound likes its predecessors did in 2009, 2010, 2011, 2012, 2013, and 2014.  It may very well go out with a bang, though, as a growing pack of Fed officials has talked up the possibility of a rate hike occurring at the December 15-16 FOMC meeting.

At the moment, the fed funds futures are showing a 64% probability that the FOMC will raise rates at its December meeting.   That's up sharply from a 6% probability seen in the previous month, yet it has slipped from the 70% probability seen after the release of the strong October employment report as the latest Producer Price Index was clearly devoid of any inflation pressure for the self-proclaimed, data-dependent Fed.

Some have argued that the 2015 FOMC missed its chance to raise the fed funds rate this past summer.  That's been an ongoing point of debate, yet our sense is that if the 2016 voters were in place in 2015, then the first move toward policy normalization would have already happened.

That's because the incoming group in aggregate leans more hawkish than the outgoing group in aggregate does.  

To that end, several 2015 FOMC members hinted at the potential for the fed funds rate to go up, yet only one FOMC member -- Richmond Fed President Lacker -- actually dissented with the FOMC decision to leave the target range for the federal funds rate unchanged.  Mr. Lacker did so at both the September and October FOMC meetings.

Meanwhile, three of the four incoming bank presidents -- Cleveland Fed President Loretta Mester, Kansas City Fed President Esther George, and St. Louis Fed President James Bullard -- have been branded as hawks given their recent views on the US economy and the appropriate timing for the the first rate hike.  Boston Fed President Rosengren will round out the group but has a more centrist position.

Below is a brief glimpse of recent remarks from each of these incoming members:

Loretta Mester

  • In an October 15 speech on long-run economic growth, she concluded by saying, "Based on my current assessment of the outlook and the risks around the outlook, I believe the economy can handle an increase in the fed funds rate and that it is appropriate for monetary policy to take a step back from the emergency measures of zero interest rates... Given the outlook, delaying the start of liftoff for too long risks having to move rates up more aggressively later on, but I see benefits of our being able to take the gradual path."

Esther George

  • In a CNBC interview on August 27 (i.e., right about the time the S&P 500 had fallen more than 12% from its all-time high), Ms. George said it is her view that the normalization process needs to begin and that the economy is performing in a way that she thinks it is prepared to take that, adding that the economy is in a good place fundamentally.
  • When she was a voting member on the 2013 FOMC, she dissented at seven of eight meetings (all but the December meeting) on the concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances, and, over time, could cause an increase in long-term inflation expectations. 

James Bullard

  • In a November 12 speech at the Cato Institute, he said, "During 2015, I have been an advocate of beginning to normalize the policy rate in the U.S.  My arguments have focused on the idea that the U.S. economy is quite close to normal today based on an unemployment rate of 5 percent, which is essentially at the Committee's estimate of the long-run rate, and inflation net of the 2014 oil price shock only slightly below the Committee's target.  The Committee's policy settings, in contrast, remain as extreme as they have ever been since the 2007-2009 crisis.  The policy rate remains near zero, and the Fed's balance sheet is more than $3.5 trillion larger than it was before the crisis.  Prudence alone suggests that, since the goals of policy have been met, we should be edging the policy rate and the balance sheet back toward more normal settings."

Eric Rosengren

  • In a November 9 speech to the Newport County Chamber of Commerce, he pointed out that the October policy directive stated, "...all future Committee meetings, including December's, could be an appropriate time for raising rates, as long as the economy continues to improve as expected.  However, with inflation still below the target, I believe the path of increases should be gradual, once we do move off the zero lower bound."

What It All Means

The Board of Governors isn't typically filled with rabble rousers and this Board of Governors is no different.  Led by Fed Chair Yellen, they continue to walk a line of open-mindedness about the path of policy rates and have been more careful to toe the Committee's policy line of letting the data dictate their policy decision.

The latter point notwithstanding, it would be remiss not to add that Fed Chair Yellen herself has been harping on the idea that a rate hike at the December FOMC meeting is a "live possibility" if the data continue to unfold as the Committee expects.

Arguably, then, one could argue that Ms. Yellen and the Board of Governors is no longer ultra dovish and has shifted to a more centrist stance when it comes to considering the target range for the federal funds rate.

Based on the bank presidents Ms. Yellen will be collaborating with on the 2016 FOMC, it doesn't appear as if it will be an easy task to build a consensus for maintaining the target range for the federal funds rate near the zero bound, particularly if the economic data continue to run along that middle ground of being okay, but not great or really bad.

Some call that the Goldilocks dynamic, which is a bit ironic considering the bears come home and ultimately scare Goldilocks out of the house.

While several of the incoming bank presidents seem to support a rate hike now, they also seem to abide by the belief that there will be a gradual path toward normalization.  That could be, yet one can't take the future for granted.  If the US economy gathers more steam than expected and inflation picks up more than expected, the 2016 FOMC may be forced to move more aggressively than expected.

No one on the committee wants to be in that position, yet with a more hawkish orientation to begin with than the 2015 FOMC, the 2016 FOMC has the makeup to push for more aggressive rate hikes should they be needed.

--Patrick J. O'Hare, Briefing.com

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