This week’s Fed meeting could produce something that
hasn’t happened since 1993: more than one governor voting against the Fed
chair. The groundwork was laid weeks ago. Welcome to monetary policy in the
age of the succession campaign.
Fed Chair Jerome Powell and his colleagues have signaled they favor
maintaining a wait-and-see approach at this week’s meeting. The potential
dissenters — governors Christopher Waller and Michelle Bowman — happen to be
President Trump’s two appointees. Both have voiced support for cutting rates,
which Trump also has publicly demanded.
Their break with Powell coincides with Trump intensifying his pressure
campaign against the Fed chair, from surprise visits to the Fed to public
attacks on the chair’s leadership, all while potential successors jockey for
position ahead of Powell’s term ending next May.
The last time more than one governor dissented in a single meeting was more
than 30 years ago, a streak that includes 259 policy meetings.
The Fed’s 12-person rate-setting committee includes all seven presidentially
appointed governors on the Washington-based board. The other members are the
regional-bank presidents, five of whom take turns voting every year and are
appointed by their bank boards.
Dissents by Fed governors were common in the 1980s, when the Reagan White
House stacked the board with governors who sought to undercut then-Chairman
Paul Volcker. But since the early 1990s, Fed governors have dissented far less
frequently than the rotating cast of Fed presidents.
That partly reflects the Fed’s evolution toward greater consensus-building.
Trump’s influence threatens to end that era of institutional harmony.
Trump did little to fundamentally change the Fed’s DNA during his first term,
“but it feels like the Fed will not escape Trump 2.0 unscathed,” said Tim Duy,
chief U.S. economist at SGH Macro Advisors. “There’s a feeling that Trump has
an influence over every institution sooner or later, and maybe the Fed’s
ability to resist it has come to an end.”
Dissents this week may be less shocking than their historical rarity would
suggest. Last September, Bowman broke the seal on Fed-governor dissents when
she became the first to do so in 19 years. She opposed the Fed’s decision to
lower interest rates by a half percentage point, from a two-decade high of
5.3%, and warned that with underlying inflation still above the Fed’s goal,
officials needed to guard against unnecessarily stoking demand. She supported
quarter-point rate cuts in meetings in November and December.
Waller followed with his own dissent in March over a decision to slow the pace
at which the Fed is shrinking its asset portfolio.
Since Trump made Powell the chair in 2018, there have been only four meetings
with multiple officials dissenting, most recently in 2020 over the central
bank’s guidance promising to keep rates low during the Covid-19 pandemic. In
those cases, all the dissenters were regional-bank presidents, not governors.
Dissents were likely inevitable this week regardless of Powell’s decision —
had the Fed cut rates, he could have faced dissents from hawks worried about
reigniting inflation.
Trump tapped Bowman to serve as the Fed’s top cop on bank supervision this
year. Waller joined the Fed board at the end of 2020.
Waller has been an intellectual heavyweight by staking out at-times unorthodox
economic positions that have aged well. He has argued over the past year that
the Fed shouldn’t overreact to price increases caused by tariffs, which he
thinks will be temporary, and that it should instead proceed with cuts this
week because the labor market isn’t as healthy as it looks.
Richard Clarida, who previously served as Powell’s second-in-command,
cautioned against automatically writing off dissents as political theater. “I
would hope that the arguments they make, if they do dissent, will get some
respect as well,” said Clarida.
Waller has framed any dissent as a principled but rare move rather than one of
reflexive opposition. “It is important to make sure that if you dissent, you
do it carefully and you have the right reasons, and it’s not going to turn
into a serial dissenting potential case,” Waller said in a recent Bloomberg TV
interview.
But Waller also has made little secret in recent weeks of his interest in
succeeding Powell when his term expires. Some of Waller’s current and former
colleagues see a dissent this week as his best chance at keeping his long-shot
candidacy viable.
Dissents don’t always provide more influence over Fed policy. By choosing to
vote against the majority, officials can forfeit their ability to shape the
postmeeting statement that officials use to tease future policy moves.
Powell is known for being able to stitch together a consensus, “but this seems
like a situation where that may just be too hard to do, in which case they
just stick with more or less the message from last time,” said William
English, a former senior Fed adviser.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
(END) Dow Jones Newswires