The Federal Reserve is not likely to follow the example of the European Central Bank when policymakers by announcing a big increase in bond purchases. It’s tricky, as the ECB found, to calibrate for the market, as the added €500 billion just matched minimum expectations and left investors disappointed.
The Federal Open Market Committee is almost certain, however, to imitate the ECB to the extent of providing a clearer idea of where things are going. The tenor of remarks from FOMC members before the quiet period began last week indicated there is no consensus for increasing the amount or composition of bond purchases, but a growing consensus on setting targets.
New Year, New FOMC Rotations
The Fed is also planning to release new charts to show the level of uncertainty or risk in the Summary of Economic Projections that accompany the FOMC meeting every three months. These charts will be published at the same time as the projections and will replace the written explanation of the exhibits previously released with the minutes after three weeks.
No other changes are forecast for the committee’s final meeting this year and the last meeting before the new president is inaugurated. Christopher Waller was confirmed for one of the two vacancies on the board of governors earlier this month. It’s not certain he will be installed in office in time for the meeting, but he has been attending anyway as chief economist for the St. Louis Fed.
The governors are permanent voting members on the FOMC, and almost always follow the lead of the chairman. The turn of the year will mark the rotation of four regional bank chiefs to become voting members of the committee. Occasionally, one or the other of these voters will dissent from the consensus statement, but in these times of near-zero interest rates the distinction between hawks and doves has become somewhat meaningless and dissents usually involve timing.
The New York Fed chief is also a permanent voting member because of the bank’s role in executing monetary policy. Due to a historical quirk, the heads of the Chicago and Cleveland regional banks rotate into voting positions every two years, and those at the nine other banks rotate every three years.
Rotating out of voting positions after this week’s meeting are Patrick Harker of Philadelphia, Robert Kaplan of Dallas, Neel Kashkari of Minneapolis, and Loretta Mester of Cleveland. Rotating in at the meeting in late January for 2021 will be Charles Evans of Chicago, Thomas Barkin of Richmond, Raphael Bostic of Atlanta, and Mary Daly of San Francisco.
For what it’s worth, Kashkari is ranked toward the dovish end of the spectrum, Kaplan is neutral, and Harker and Mester are hawkish. For 2021, Evans and Daly are considered dovish, Bostic, neutral, and Barkin, hawkish. Waller hasn’t been ranked but his boss in St. Louis, James Bullard, is considered dovish.
Since Judy Shelton is highly unlikely to win confirmation, there will be one open board seat for President-elect Joseph Biden to fill. Also, Jerome Powell’s term as chairman is up in February 2022 and he is likely to either be renamed or replaced several months before that date.
Although a board term is theoretically 16 years, most are much shorter since members are usually appointed to unexpired terms. There is a fair amount of turnover, given that board members are on a government salary (unlike regional bank chiefs, whose salaries are higher), so Biden is likely to have other openings to fill before 2025. Vice chairman Richard Clarida’s board term finishes in 2022, and others may move on.
Besides steering monetary policy, the Fed is the main bank regulator in the U.S. It has been slower than other central banks—such as the ECB and Bank of England —in urging banks to include climate risk in their calculations.
But now the Fed is contemplating inclusion of climate risk in stress tests, and this has drawn opposition from Republican lawmakers in Congress. Forty-seven of them signed a letter to Powell and Randal Quarles, vice chairman for supervision, warning them against such a move, arguing that it has been “plagued with speculation, inconsistencies, and reliance on long-term projections that may not adequately account for shifting market dynamics.”
The main worry is that banks will stop lending to fossil fuel companies, and that could hurt an economy that still needs these sources of energy. It’s not a controversy that will go away, but markets are probably ahead of regulation in forcing change.