By Greg Robb
The aftermath of the coronavius pandemic has created so much ambiguity about the U.S. economy that Federal Reserve officials could find themselves seriously divided over the proper course of action, a rare experience for the central bank. Divisions might be revealed in the open next year.
For decades, Wall Street has become used to a U.S. central bank where “dissents have been isolated,” said Steve Englander, head of North America Macro Strategy for Standard Chartered Bank. Uncertainty over policy could lead to volatile markets.
Englander said the Fed disagreement over the economy is not ideological. There are just different points of view.
“I think everyone respects [Fed Chariman Jerome] Powell, and its not like the Democrats and Republicans in Congress,” he said.
Fundamental questions are being debated among Fed officials. Is the labor market tight or loose? Will the spike in inflation be temporary or long-lasting? Is the health of the recovery still uncertain?
“Right now, the economy is in a state of flux — it’s a state of constant change and churn,” New York Fed President John Williams told reporters earlier this month.
Supply and demand are moving very quickly, with some parts of the economy experiencing slack and other parts very tight, he added.
The Fed’s interest-rate committee, formally known as the Federal Open Market Committee, is fairly dovish this year, and there have been no dissents to the leadership of Powell.
Read: These are not normal times for the Fed
But next year, the four regional Fed presidents who have a vote on policy are all heavily hawkish, Englander notes. He sees the possibility there could be as many as five dissents or more to policy decisions.
“It is even possible that Fed Chairman Jerome Powell could be outvoted,” Englander said. A Fed chairman being in the minority has not happened since the 1980s.
Rotating onto the FOMC in 2022 are St. Louis Fed President James Bullard, Kansas City Fed President Esther George, and Boston Fed President Eric Rosengren. These three officials have called for the Fed to taper its bond purchases sooner rather than later. Cleveland Fed President Loretta Mester will also be a voting member of the FOMC next year. She hasn’t been as hawkish but still would like to see the asset purchases end by the middle of 2022, earlier than many doves.
The FOMC “will look hard for ways to avoid such a split in its ranks,” Englander said.
Powell has championed a new dovish policy framework, under which the Fed has said it will hold interest rates close to zero until the labor market has hit maximum employment and inflation has risen to 2% and is on track “to moderately exceed 2% for some time.”
Carl Tannenbaum, chief economist at Northern Trust in Chicago, thinks the Fed’s new strategy on raising rates is too opaque.
“The Fed did not tell us over what time period they wanted inflation to average 2%. They did not say there is a level of periodic inflation that would be too high,” he said.
“So we really don’t know where the tripwire is or how they would inject the data that’s incoming. That’s why we’re back to parsing statements and clues. If their intent was to make things more transparent, they have not been successful,” Tannenbaum added.