US FEDERAL RESERVE IN FOCUS Who Matters In The FOMC? Sensing the Fed is finally on the cusp of normalizing pol- throughout the last few years) and the QE program com- icy interest rate, there will be a sharper intensity in mar- ing to an end in the next FOMC meeting on 28-29 Oct 2014, ket’s Fed watching, not just about the FOMC decisions the market is sensing that the Fed is finally on the cusp of and the minutes, and also Fed officials’ commentary. normalizing the FFTR. The market consensus is currently ex- pecting the Fed’s rate-lift off to take place in the summer of A recent St. Louis Fed report highlighted that between 2015 (we are expecting it to be announced in the 16-17 June 2008 and 2014, the Fed Reserve bank presidents ac- 2015 FOMC). Thus, there is increasingly intense interest in Fed counted for all of the dissents since 2008 which is un- watching, both in terms of the FOMC decisions & minutes as usual according to the authors. In prior years, both Fed well as the comments from senior Fed Reserve officials that Presidents and Fed Board Governors dissented. are participants in the FOMC (voters and non-voters). In 2014 FOMC decisions so far, Charles Plosser and Rich- First, it is instructive to have a bit of background to the mon- ard Fishers are the key dissenters. And we believe that etary policy formulation process within the US Federal Re- they may be joined by Loretta Mester in the dissent serve. The Federal Reserve controls the three tools of mon- camp for the remaining FOMC decisions in 2014. But etary policy--open market operations, the discount rate, and their dissent is unlikely to have a large effect on policy, reserve requirements. The Board of Governors of the Federal as Fed Chair Janet Yellen will still be able to press ahead Reserve System is responsible for the discount rate and re- with majority support rather than seeking unanimity serve requirements, and the Federal Open Market Committee (7-3 votes in the base case scenario). (FOMC) is responsible for open market operations. Using the three tools, the Federal Reserve influences the demand for, In 2015 FOMC, Richard Fisher, Narayana Kocherlakota, and supply of, balances that depository institutions hold at Loretta Mester, and Charles Plosser will rotate out of Federal Reserve Banks and in this way alters the federal funds their voting positions, and the incoming voters are rate. The federal funds rate is the interest rate at which de- Chicago Fed President Charles Evans (Dove), Rich- pository institutions lend balances at the Federal Reserve to mond Fed President Jeffrey Lacker (Hawk), Atlanta other depository institutions overnight. Fed President, Dennis Lockhart (Centrist – tentative dovish bias), and San Francisco Fed President, John The FOMC which consists of 12 members--the seven mem- Williams (Dove) which we should pay more attention bers of the Board of Governors of the Federal Reserve to. So it seems there will be more doves replacing the System; the president of the Federal Reserve Bank of New departing hawks (Fisher and Plosser) for now, which in York (permanent seat); and four of the remaining eleven our view benefits Yellen’s dovish approach. Reserve Bank presidents, who serve one-year terms on a rotating basis. Non-voting Reserve Bank presidents attend The rest of the important 2015 FOMC voters are the 5 the meetings of the Committee, participate in the discus- Fed Board Governors and the New York Fed Presi- sions, and contribute to the Committee’s assessment of the dent, William Dudley. It is unlikely for US President economy and policy options. (Information taken from Obama to fill the 2 vacant Governor seats next year, so http://www.federalreserve.gov/monetarypolicy/fomc.htm) the number of FOMC voters is expected to remain at 10 in 2015. Currently, there are 2 vacant governor seats which are unlike- ly to be fill anytime soon as there is not much Senate session days left before the mid-term elections on 4 November 2014, and the Senate has taken an average of 119 days to confirm Who Are The Key Players In 2014 FOMC? Obama’s 10 Fed Board nominations since 2009. So there are In response to the onset of the 2008 financial crisis, the US only 10 voting members in the 2014 FOMC comprising of: Federal Reserve started cutting its benchmark policy interest rate, the Fed Funds Target Rate (FFTR), first on 18 Sep 2007, by 1. Fed Board of Governors, Chair Janet Yellen an initial 0.5% cut to 4.75%, and by the time we reached the 2. Fed Board of Governor, Vice Chairman Stanley Fischer 10th rate cut on 16 Dec 2008, it was lowered by a final 0.5%, (permanent FOMC voter) to between 0% and 0.25% where it has remained ever since. 3. Fed Board Governor Jerome Powell And when the aggressive cuts in short interest rates proved (permanent FOMC voter) to be insufficient, the Fed also embarked on unconventional 4. Fed Board Governor Lael Brainard quantitative easing (QE) programs as part of their expansion- (permanent FOMC voter) ary monetary policy to help turnaround the ailing US econo- 5. Fed Board Governor Daniel Tarullo my and the sharp increase in unemployment. (permanent FOMC voter) 6. New York Fed president and Vice Chairman, William Dudley After quite a few false starts (of expecting interest rate hikes (permanent FOMC voter) QUARTERLY GLOBAL OUTLOOK 4Q2014 18 UOB Global Economics & Markets Research US FEDERAL RESERVE IN FOCUS 7. Dallas Fed President Richard Fisher tion than is suggested by the Committee’s stated forward (voter in 2014 FOMC) guidance.” 8. Minneapolis Fed President, Narayana Kocherlakota (voter in 2014 FOMC) Will There Be More Dissents In 2014? 9. Cleveland Fed President Loretta Mester If the US remains on its current course of continued, moderate (voter in 2014 FOMC) improvement (both in the economy and the labor market), 10. Philadelphia Fed President Charles Plosser then both Plosser and Fisher will likely continue to dissent (voter in 2014 FOMC) in the Oct 2014 and Dec 2014 FOMC meetings. And we note that both Plosser and Fisher will be rotated out of their voting An Interesting History Of FOMC Voting & Dissent roles in the 2015 FOMC, so they probably have to make their In a recent report published in the 3Q 2014 Federal Reserve voices heard louder (via their dissent votes) in the last 2 FOMC Bank of St. Louis Review (16 Sep 2014), the authors, Daniel decisions of 2014. The question is whether anyone else will Thornton and David Wheelock, found that over the period be joining them in voting against policy decision. 1957-2013, Fed Reserve bank presidents dissented 241 times, and Fed Governors dissented 208 times. While the number of We note that the recently appointed Cleveland Fed Presi- dissents by governors surpassed the number of dissents by dent, Loretta Mester, began her career in the Federal Reserve presidents in many years, Thornton and Wheelock noted that Bank of Philadelphia where she rose to the position director presidents have accounted for all but four (72 of 76) dissents of research at the Federal Reserve Bank of Philadelphia and between 1994 and 2013. If the period is narrowed down to chief policy advisor prior to her current appointment. Since between 2008 and 2014, then the Fed Reserve bank presi- Mester retained her role under the hawkish Philadelphia Fed dents accounted for all of the dissents since 2008 which is president Plosser, the initial expectations were that her views unusual according to the authors. The report also found that would likely align with his. That said, she has voted for the “over the FOMC’s history, Fed Reserve Bank presidents more FOMC monetary policy action in the last 3 FOMC decisions, often dissented in favor of tighter policy than easier policy, unlike her former boss. Her recent comments (5 Sep 2014) whereas a majority of dissents by Federal Reserve governors noted that while the “exact timing” of rate hikes depends on were in favor of easier policy.” But the report also noted that the economy, Mester opined that the Fed is much closer to not all dissents were for or against the current policy stance achieving its economic goals than it has been for a long time, but the voter “dissented because he or she disagreed with as the economy is on firmer ground. She also wants the Fed language in the Committee’s statement about possible future to make clearer that the timing and pace of future interest changes in policy.” rate hikes will be driven by the performance of the economy although she declined to say when she thinks the lift-off will Of course history cannot serve as an accurate guide to be. how the current FOMC members will vote and we do have two new FOMC board Governors (Stanley Fischer and Lael In comparison, Minneapolis Fed President, Narayana Kocher- Brainard, confirmed by Senate in June 2014) and a new Fed lakota’s latest comments (22 Sep 2014) warned against raising President (Loretta Mester who succeeded Sandra Pianalto as interest rates with inflation so low and opined the unemploy- Cleveland Fed President with effect from 1 June 2014). ment rate overestimates labor market recovery. Instead, he advocates that the Fed to set the goal to bring inflation to 2% So far in 2014, we have went through 6 FOMC and three were to avoid “European and Japanese” situations and proposed passed with unanimous decisions (January, April and June) the Fed set a 2-year time horizon to achieve its 2% inflation while the other three were passed with dissenters.