Is Yellen Starting a Civil War at the Fed?
Janet Yellen continues to be an inflation dove, and last week, she suggested that the FOMC keep interest rates low, even if unemployment continues to fall and official inflation rates increase.
After more than seven years of rates below 1 percent, several members of the FOMC have started to worry about just how they're going to re-establish any credibility. It's already become abundantly clear that the Fed is too frightened to do much of anything other than sit around and hope that the economy will somehow move out of its multi-year cycle of low expectations and mediocre growth.
In remarks last week that jarred the market, Yellen ruminated about the benefits of letting inflation run a little hotter than normal while allowing the unemployment rate to drop below the point that historically would trigger Fed tightening action.
To many observers, the comments were a clearly dovish signal that she favors a lower-for-longer approach when it comes to interest rates.
But that kind of attitude could exacerbate tensions among Federal Open Market Committee members, in particular those who have been clamoring for rate hikes.
"Despite the fact that rates were not raised at the September FOMC meeting as we predicted, the truce at Federal Reserve has never been more tenuous and appears to be on the verge of an outright civil war," Doug Roberts, chief investment strategist at Channel Capital Research, said in a note. "The truce between hawks and doves is now being renegotiated."
Unfortunately, this talk of "civil war" can only be described as hyperbole. What CNBC is calling "civil war" is what any other political institution on the planet would regard as "normal debate." One would certainly like to see an actual civil war (rhetorically speaking) at the Fed since this might indicate an end of the long-standing habit of allowing the Fed chairman to dictate to the FOMC. The fact that at the September meeting there were three dissenters on the FOMC (out of ten voting members) hardly suggests a robust discussion is about to break out there over the medium or long term.
Yes, it's true that three dissents at a single meeting is above the usual average. And, in many years over the past decade, there were fewer than five dissents for the entire year. But, the fact that 3 no votes out of ten can be seen as a sign of strife emanates from the fact that dissent of any kind on the FOMC has long been largely taboo.
This was especially the case during the Greenspan years when Greenspan more or less ruled the FOMC with an iron fist. As recounted by Frederick Sheehan in his book Panderer to Power, Greenspan himself controlled everything about the FOMC's messaging and he drafted the FOMC statements that were to be issued after the meeting — without any input from the committee. Even Yellen herself, who had served on the committee in the 1990s, said being a Fed governor was "a great job, if you like to travel around the country reading speeches written by staff." In other words, being a Fed governor meant repeating the talking points written up by Greenspan himself or his tightly controlled staff. Greenspan did not look upon dissent kindly. Not surprisingly, then, we see that Greenspan was among the Fed chairmen whose tenures were characterized by few dissents:
Note also that, when we look at dissents per year, the 1990s and 2000s saw very few dissents indeed:
Of course, part of this is due to the fact that the US economy was in a 20-year boom period. Every time the economy seemed to be in trouble, the FOMC simply opened the money spigot, and everything returned to "normal." That all ended in 2008. When that financial crisis hit, the FOMC response was just more of the same. Except this time, the economy never returned to where it had been. Workers left the job market, real incomes withered, and GDP growth rates continued to get smaller.
So, the Fed kept rates at 0.25 percent, year after year after year. Only perennial inflation hawks like (now-retired)Tom Hoenig at the Kansas City Fed put up much of a fight. For the most part, the entire board agreed year in and year out that more quantitative easing will somehow fix everything.
Now, eight years into the current anemic "expansion," the FOMC has no idea where to go when the next recession starts. With rates already so close to zero, will it turn to negative rates? Will it resort to helicopter money? There's a perception that something must be done to give the Fed some breathing room before things turn bad.
Hence, Yellen is now facing this "civil war" for lack of a more accurate term. Seven out of ten voting members remained with Yellen during the September meeting, though, so, for now, there appears to be little danger of any meaningful revolt.