New FOMC Policy Members to Come Aboard Next Month

Vito J. Racanelli

It’s that time of year for the Federal Reserve Board. No, not forecasting what it will do in 2020, but The Game of Chairs, I call it.

For the uninitiated, the Fed’s interest rate policy is set by the Federal Open Market Committee, FOMC, is composed of 12 members--the seven members of the Board of Governors and five of the 12 Reserve Bank presidents around the country. The Board chair, Jerome Powell currently, serves as the FOMC chair; the NY Fed president is a permanent member of the Committee and is vice chairman of the committee.

Here’s the fund part: the presidents of those other 12 Reserve Banks fill the remaining four voting positions on the FOMC on a rotating basis. Next month, the annual FOMC rotation of members means the chiefs of the Cleveland, Philadelphia, Dallas and Minneapolis reserve banks will join the group, gaining a formal vote on monetary policy decisions, while the Boston, Chicago, Kansas City and St. Louis Fed bank leaders “will be voted off the FOMC island,” so to speak. They can participate at meetings but no longer vote.

I’m being facetious, but there are times when such changes can be important. The FOMC is an independent body and all members vote their conscience, but in practice the Fed chair is the first among equals, and the FOMC’s voting mostly goes along with the chair’s thinking.

There have been periods, like 2019, in which meetings were more fractious than usual. According to The Wall Street, during the three Fed funds rate cuts this year, officials were more divided over the moves than at any other time during Powell’s tenure. Eventually, the policymakers converged on rate cuts.

Of the new FOMC members, three—Cleveland, Philadelphia and Dallas—are thought to be weak advocates for rate reductions. Of course, as Powell has signaled, the Fed has made all the rate cuts already that it is prepared to make. The rest will depend on the data.

I wonder now if inflation and growth does creep up whether the new members will agitate more strongly for rate hikes? As noted above, in the end the FOMC tends to go along with the chairman.

The Fed continues to inject hundreds of billions of dollars into money markets since a September spike in repo rates, in order to reduce volatility. This has reversed roughly half of the Fed’s shrinkage of its asset portfolio over the prior two years. The Fed has been adamant that this is not quantitative easing.

Separately, the Bank of Mexico has indicated further interest-rate cuts are on hold, though inflation is below the central bank’s 3% target and the newly minted trade deal with the U.S. and Canada removed a cloud of uncertainty.

The CME fed futures market, which currently puts a rate change probability sometime next year at less than 50%. The U.S. Treasury 10-yr note yield was around 1.87%, down from 1.92% last week and below 1.5% in September.

Upcoming: 1/28-29 - FOMC meeting. No action expected.

More from the author

Vito J. Racanelli
Share
Disclosures (show)
FS Insight

Sign in to read the report!

We have detected you are an active member!

Ray: 76004e-b0f3e1-a2b543-ef3578-70d3c9

Don't Miss Out
First Month Free

Tickers

Trending tickers in our research