For governors of the Federal Reserve, dissenting from rate-setting decisions has become as gauche as wearing tie-dye to a funeral. As the chart below shows, dissents by governors went out of fashion around 1995. The last time any governor cast a contrary vote on a decision by the Federal Open Market Committee was September 2005. (For your next Fed trivia contest: That was Mark Olson, an appointee of President George W. Bush, who thought monetary policy should be more dovish.)
Have Fed governors fallen for groupthink? Is the U.S. economy vulnerable because the governors who set interest rates are marching in lock step instead of exercising independent judgment? Or is the number of dissents failing to capture the degree to which Fed governors think for themselves and exert independent influence on monetary policy?
Before we try to answer those questions, I want to show you another chart. This one is of dissents by presidents of the Federal Reserve banks who sit on the Federal Open Market Committee. (I explain the difference between the two kinds of voters below.) You can see that they’re a more obstreperous lot. Although even among them, dissent has tailed off recently. The last one was in June 2022, by Esther George, then the president of the Federal Reserve Bank of Kansas City. She, like Olson, was arguing for easier monetary policy.
I’m not sure how much of a problem all this is, so let me just give you the arguments. Andrew Levin, a former Fed staff member who is a professor at Dartmouth College, has been presenting charts similar to these to make the case that — as he told me — the Fed’s rate-setting committee has become “much more like a corporate board, especially one where the C.E.O. is also chairman of the board.”
Jerome Powell, the chairman of both the Fed’s Board of Governors and the Federal Open Market Committee, has created a culture that “rewards people for supporting the committee’s decisions,” Levin told me. “There’s a clear indication that if someone does dissent, they’re off the reservation. They’re going to be ostracized.”
Levin has a broader complaint against the Fed, which is that it has become an undemocratic “fourth branch of government” and needs to be overseen more closely by the Government Accountability Office and a fully independent inspector general.
For now, let’s stick with the topic of dissents or the lack thereof. For background, the Federal Open Market Committee is the panel that decides whether to raise or lower interest rates and conduct other operations with the goal of keeping the economy at full employment with low and stable inflation. The committee includes all seven members of the Board of Governors, who are nominated by the president and confirmed by the Senate. They sit in Washington. It also includes five of the 12 regional bank presidents. The president of the Federal Reserve Bank of New York is always on it. Four others rotate through on one-year terms.
If you’re looking to argue that the Fed suffers from too much unanimity, the inflationary surge of 2022 looks like evidence. It’s clear in retrospect that inflation was bubbling up starting in 2021, but it wasn’t until March 2022 that the committee approved its first increase in the federal funds rate. In speeches, various members of the committee had been expressing concerns about inflation, but they weren’t voting that way. Throughout 2021 and 2022 there was only one dissent by someone saying monetary policy should be tighter. That was James Bullard, then the president of the Federal Reserve Bank of St. Louis, in March 2022.
So that’s the case for why the dearth of dissents is dangerous. For the opposite viewpoint, I spoke with Ellen Meade, a research professor of economics at Duke University. She worked at the Fed for 25 years in stints between 1984 and 2022, including one writing up the minutes of Federal Open Market Committee meetings.
“I don’t see the lack of dissent in the minutes as a big deal,” Meade told me. “If you said the chair is trying to constrain the conversation, I would say, ‘Wow, that’s bad.’ But people are very willing to say what they think.” In other words, she doesn’t buy what Levin said about ostracism of dissenters.
Meade said one reason dissents are few is that “the meetings aren’t about today, they’re about tomorrow.” Committee meetings occur eight times a year. Committee members give speeches and interviews and talk with one another. They don’t want to surprise the financial markets. So by the time a meeting is held, the decision of what to do about rates today is pretty much set. Most of the discussion at the meetings is about tomorrow, namely the future path of interest rates, she said. If a voter feels uncomfortable with the (unanimous) rate decision, that person will try to rally support for a different path at future meetings.
Now for my theory about why there are fewer dissents these days, especially by governors. Ever since the global financial crisis of 2007-9, it has been clear that the Fed’s standard interest-rate tools are insufficient for getting the economy out of deep slumps. So it has turned to unconventional tools such as “forward guidance,” which is essentially talking about what you will do in the future. If you want to give markets confidence that financial conditions will be conducive to investment, you don’t just lower interest rates now — you promise that you’ll keep them low for a long time to come.
That’s where unanimity matters. The members of the Federal Open Market Committee need to present a united front to make their forward guidance seem plausible and reliable. That’s why the committee is consensual, like a corporate board, as Levin says, rather than fractious, like Congress.
It’s a sensible strategy. The risk is that members who feel pressure to agree with one another will agree on the wrong thing.
Outlook: Goldman Sachs
Spillover effects from pandemic-related supply disruptions are reversing, and that’s good news for inflation, economists at Goldman Sachs said Friday. “As these factors normalize, we expect global core inflation to slow to just 2.25 percent by the end of 2024 — and, depending on the size of these spillover effects, we see a meaningful risk that core inflation could undershoot the 2 percent target of major central banks,” wrote Andrew Tilton, David Mericle, Joseph Briggs, Devesh Kodnani, Katya Vashkinskaya and Blair Turoff.
Quote of the Day
“What economists know seems to consist entirely of a list of things that cannot go on forever, and this may be one of them. But if it can’t go on forever it will stop. And if we never do anything that we can’t go on doing forever we will never do very much.”
— Herbert Stein, “My Foreign Debt,” The Wall Street Journal (May 10, 1985)