Fed members dissenting…nothing new about it

There is a huge divide amidst Fed members on the future Fed policy moves.  There are a number of suggestions apart from QE2 – price level targeting, inflation targeting etc. But as both do not look politically feasible as it will require changes in Fed Act, permission from Senate etc…QE2 looks like the only short-term option. For QE2 we see a divide going by various member speeches:

  • The Doves (in favor of QE2)  –Yellen, NY, Chicago, Atlanta, Boston
  • The Hawks (not in favor) – –Kansas Fed (says raise interest rates gradually), Minneapolis Fed, Philadelphia (QE2 not effective), Dallas Fed, St Louis
  • Not Clear – –Bernanke: has said Fed ready to stimulate if eco worsens but only after looking at costs and benefits of the various tools

Having said this, how has the dissent been in past meetings?

Chanont Banternghansa and Michael W. McCracken of St Louis Fed have a paper on the topic which tracks dissent in FOMC from 1992-98 period. There is a nice summary here:

we take a completely different approach to measuring disagreement—one that is not based on whether an individual casts a dissenting vote regarding a policy action. We measure disagreement using internal forecasts made by each individual FOMC member in preparation for a subset of the FOMC meetings that occurred from 1992 to 1998. By taking this approach, we are able to make much finer measurements about the degree to which a specific member of the FOMC disagrees with other members regarding the state of the economy and, potentially, how much each disagrees with a proposed policy action.

The data are based on those used for the semiannual monetary policy report to Congress, made in February and July of each year since 1979. Before each of these releases, each member of the FOMC makes a forecast of end-of-year nominal and real GDP growth, inflation and the unemployment rate. The February forecasts are for the current calendar year. In July, two sets of forecasts are given: an updated forecast for the current calendar year and a longer-horizon forecast for the next calendar year. Once these forecasts have been collected from each member of the FOMC, the maximum, minimum and a trimmed range (based on dropping the three highest and three lowest values) of each of the four variables are included in the monetary policy report to Congress.

Findings are interesting:

Not surprisingly given Figure 1, we find that on average across the available data, the St. Louis, Cleveland and even the Dallas Feds tended to exhibit the largest levels of disagreement on inflation. Quite intuitively, we also find that the vice chairman tended to be one of the most consensus-oriented members of the FOMC.

In contrast, for the unemployment forecasts, there does seem to be a significant effect due to the state of the national economy. As the national unemployment rate rises, the degree of disagreement among the members’ unemployment forecasts increases just a bit. At some level, this makes sense. When unemployment is high, there tends to be a great deal of uncertainty in the economy. If there is a great deal of uncertainty in the economy, it is intuitive that there might be greater uncertainty about policy among the FOMC members and, thus, greater disagreement among their forecasts. In addition, as was the case for the inflation forecasts, the St. Louis Fed consistently tends to exhibit one of the largest levels of disagreement and the vice chairman tends to exhibit one of the smallest levels of disagreement.

The results for directional disagreement tend to be a bit more interesting. In particular, the results indicate a clear tendency of the FOMC members to treat their inflation and unemployment forecasts as trading off one another.

For example, those individuals who tended to forecast lower levels of inflation than the consensus also tended to forecast higher levels of the unemployment rate than the consensus. A good example of this is the Minneapolis Fed, which had a tendency to forecast lower inflation than the consensus while simultaneously having a tendency to forecast unemployment to be higher than the consensus.

Hmm. Further there are regional effects:

This tradeoff can also be seen in the regional effects. Apparently, as a given region’s unemployment rate rises above the national unemployment rate, the regional bank president tends to have a lower inflation rate forecast than the consensus while simultaneously having a higher unemployment rate forecast than the consensus. Again, the rationale for this regional effect is intuitive. If members observe particularly low unemployment in their region, they would naturally expect inflation pressures in the future as households spend more of their income. Similarly, if members observe higher unemployment in their region, one might conjecture spillover effects to the economy as a whole, implying that the future inflation rate will be lower.

And while not nearly as strong an effect as those already discussed, the tradeoff appears in both the national and the voting effects. As either the national unemployment rate rises or members switch from being nonvoting to voting, their inflation forecast tends to be lower than the consensus and their unemployment forecast tends to be higher than the consensus. Unfortunately, there does not seem to be an obvious reason for why such a tradeoff should exist between the inflation and unemployment forecasts due to voting status or the national unemployment rate.

Fascinating stuff. How all these decisions are made and factors behind them..

Though times have changed since 1998 and we do not even have same members. Still I think there will be some similarity.

Also it would be interesting to track the changes in Fed President profile. Say Yellen has moved from San Fransisco Fed to Fed Vice Chairman. So does her forecasting, outlook change as well. As the above study shows Fed Vice Chairman hardly disagrees with the overall view. It will be great to replicate this stud with today’s times….

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