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September 23, 2016

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Dissenting voices up the ante on Fed chief Yellen

JANET Yellen’s Federal Reserve has demonstrated one of the core tenets of central banking: On the Fed panel that sets interest rates, some votes are more equal than others.

The panel — the Federal Open Market Committee — voted on Wednesday to keep rates unchanged, something it’s done for six straight meetings. What was unusual this time was that the result drew dissenting votes from three members — the most dissents in nearly two years.

The 7-3 vote reflected “no” votes from the presidents of three regional Fed banks — Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston. All wanted to raise rates immediately. And all were powerless to do so.

Not since December 2014, when Ben Bernanke led the Fed, had so many policy-makers dissented from a Fed vote. But critically, the “no” votes included none of the Fed’s influential board members in Washington.

The FOMC’s voting members are made up of seven board members in Washington (there are two vacancies); the head of the New York regional Fed; and four of the 11 other regional bank presidents who serve on a rotating basis.

The last time any board member has dissented from a Fed policy vote was more than a decade ago, in 2005.

That’s where the unequal nature of Fed votes comes in. The Fed isn’t like the Supreme Court, where 5-4 rulings are common. Fed leaders generally prefer votes that are unanimous or nearly so — to foster confidence among investors that it’s pursuing rate policies that command broad support.

But if Fed leaders can’t get all voting members of the FOMC to back them, they can still preserve market confidence if they enjoy the support of all members of the board. Like the Fed chair, the board members are hand-picked by the president and confirmed by the Senate to a job in which they’re supposed to represent the entire country.

By contrast, the regional bank presidents are chosen by the boards of each regional bank. They tend to represent the views of business leaders in their districts, and they are often perceived as being sympathetic to banking interests and quicker to support increases in interest rates.

Once during the mid-1980s, when Paul Volcker, then the Fed chair, was outvoted by the seven-member board, he went to Treasury Secretary James Baker and offered to resign. Baker resolved the conflict by persuading Fed board members to change their votes and back Volcker.

Yellen, like most of her predecessors, has managed to maintain solid support among the board and the New York Fed president. Wednesday’s vote showed that the chair, mindful that she and her allies represent the central bank’s power base, isn’t unduly bothered by a trio of dissents from regional bank presidents.

“Yellen is not losing control of the committee,” said Brian Bethune, an economics professor at Tufts University in Boston. “As long as a Fed chair has the support of the board, she will feel comfortable.”

That doesn’t mean the regional Fed presidents have no influence. Some economists say they think the Fed’s statement on Wednesday was shaped to signal that a rate hike is coming, probably in December, in part because of the growing number of dissents. “Three dissents are not normal; they are rare,” said David Jones, who has written books on the Fed’s history. “This is something Yellen is going to have to deal with.”

The betting is that she will deal with it by steering the committee to support a rate hike by year’s end. Far from seeming flustered by the three dissents, Yellen said at a news conference that it’s helpful that the Fed’s policy panel represents a range of views. “The FOMC is not a body that suffers from group think,” she said.


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