FOMC composition still unfolding; how hawkish will it be?

By Theresa Sheehan, Economist
December 28, 2021

The final FOMC meeting of 2021 is in the rear view mirror. It is clear that the Federal Reserve intends to swiftly wind down its asset purchases – likely by the end of first-quarter 2022 – and is preparing to lift short-term rates off the effective lower bound. Now attention will shift to a longer policy horizon and issues of when and how the Fed might start to reduce the size of its balance sheet. While policymakers will do some preliminary thinking, there’s a fair distance to go before they get there. In part, the timing will depend on just how hawkish the composition of FOMC voters is.

The final composition of 2022 voters is as yet unknown. The situation is fluid due to the vacancies – current or soon to take place – on the Board of Governors and among the District Bank presidents.

The voting rotation for district presidents will take place at the January 25-26 FOMC meeting. Next up are voters for Cleveland, Boston, St. Louis, and Kansas City. Cleveland’s Loretta Mester tends to lean to the hawkish side on monetary policy while St. Louis’s James Bullard is a definite hawk as far as removing stimulus goes. And Kansas City’s Esther George is a definite hawk on avoiding possible imbalances in the financial system. The question mark is the vote for Boston. Until a new president is appointed, that vote will go to the district’s alternate, Philadelphia. Philadelphia’s Patrick Harker is a moderate, but he is likely to support the end of asset purchases sooner rather than later, although he may be more cautious on lifting interest rates. In any case, whether hawk or dove, the District Banks – including FOMC Vice Chair John Williams of New York – will be in agreement that the dual mandate requires monetary policy to dial back on accommodation.

Some of that agreement is based on addressing inflationary pressures. Although decreases in energy costs and some modest improvements in the supply chain are starting to move through the monthly data, it will still take some months before the process is complete. Consumers in particular are feeling sensitive to higher prices for big ticket items like motor vehicles and appliances, as well as rents. Many businesses, about to renew annual contracts, will probably impose some hefty price increases in January that will contribute to upward pressures in the short term.

Building evidence that the economy is moving toward maximum employment is another factor for the Fed. Though many workers are still displaced by the pandemic, the labor market, amid a rapidly expanding economy, is tight. This is an opportunity for workers on the margins to find jobs and training at better wages and benefits, and workers with sought-after skills to improve on present compensation. The situation means the economy is less in need of stimulus.

However, while all policymakers may be ready to end asset purchases, many may be more reluctant to increase interest rates after their experience the last time they tried, starting in late 2016. By 2019 there was a necessity to roll back some of the hikes when it became clear the economy wasn’t as ready for higher rates as previously thought. The “mid-cycle adjustment” ended up becoming an easing cycle.

The Fed’s quarterly forecasts in December point to three rate hikes next year but should not be read as a promise that this going to happen. There are many risks and uncertainties that even a hawkish Fed will have take into account.

Among the votes on the Board of Governors, the ultimate balance of views will probably be on the dove-to-moderate scale. Much will depend on the changes in the makeup of the Board of Governors. All governors are voters on the FOMC. The two vacancies created in late 2021 and the third expected by the end of January 2022 mean that only four seats on the board will be filled in the near future. Right now there is moderate Chair Jerome Powell, dovish Governor Lael Brainard, and moderate hawks in Governor Christopher Waller and Governor Michelle Bowman, and outgoing Vice Chair Richard Clarida.

The Biden Administration has nominated Powell to a second term as chair to begin in February 2022 (his term as governor runs through January 2028) and Governor Brainard as Vice Chair (if confirmed, she would get a four-year term in this post through early 2026; her term as governor runs through January 2026). However, there’s a long vacant spot for a governor’s term running through January 2024, which may be a little difficult to fill given that the nominee would only serve two years before needing to be reappointed. Less problematic to fill is the one being vacated by Randal Quarles that runs through January 2032, or the one expected to be vacant at the end of current Vice Chair Richard Clarida’s term as governor which ends January 31, 2022 and resets to a 14-year term running through January 2036.

There’s also the matter of nominating a new Vice Chair of Supervision to a four-year term. This is likely to go to one of the nominees for a vacant spot rather than a sitting governor. Waller is a Trump appointee whose expertise is more on the research side of Fed governors’ duties. Bowman is a Trump appointee who fills the spot reserved for a community banker.

There are a number of names being floated for the empty seats on the board including former Governor Sarah Bloom Raskin, Atlanta Fed President Raphael Bostic, and former CFP Director Richard Cordray. President Biden will be under pressure to pay attention to inclusion and diversity in naming his picks to the board. Given the sometimes lengthy and all too often contentious process of confirmation, it is hoped that the nominations will be made soon. The White House will have to renominate Powell and Brainard to the Chair and Vice Chair jobs again when the new Congress is sworn in. It is possible that at least one or two nominations for new governors will be done at the same time. Look for candidates that thread the needle of acceptability for both Republicans and Democrats. Choices are likely to be noncontroversial and as apolitical as possible to avoid a drawn out and ugly confirmation process.


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