The Federal Open Market Committee (FOMC) is the monetary policy-making body of the Federal Reserve System. The FOMC is composed of 12 members — the seven-member Board of Governors and five members drawn from the 12 regional Reserve Bank presidents. The Chairman of the Federal Reserve — currently Jerome Powell — also serves as the Chair of the FOMC; the six remaining Board members, along with the president of the Federal Reserve Bank of New York, are permanent voting members. The other four voting positions are typically filled each year on a rotating basis from the remaining presidents of the other regional Reserve Banks.
We wrote last year that 2022 would shape up to be anything other than a typical year. We had no idea how right we would be. The composition of the FOMC was changed significantly with three new members of the Board confirmed by the Senate this past Spring and Summer. Lisa Cook & Philip Jefferson took office in May and Michael Barr, vice chairman for supervision, was confirmed in July.
With the FOMC aggressively fighting historically high inflation in 2022, previously reliable dovish members James Bullard and Neel Kashkari were some of the most outspoken hawks on the committee. Traditionally, however, a consensus-minded Fed will follow the lead of the Chairman and in 2022 most voters have gone along with the rate hikes. Bullard dissented in March in favor of a larger rate hike than was announced, while Kansas City Fed President Esther George dissented in June in favor of a smaller hike.
*A dove generally favors easier monetary policy, preferring to keep interest rates lower to increase borrowing and spending, thus stimulating the economy. A hawk, conversely, favors tighter monetary policy through higher interest rates to keep prices stable.
If tradition holds true to form, following the lead of the Chairman leads us to believe the Fed will still have a hawkish tilt in 2023, even with the annual rotation of voting Regional Fed Presidents. Chairman Powell has remained steadfast in his conviction to fight inflation, raising the Fed’s benchmark interest rate by 3.75% to date this year, with promises of more to come if inflation does not come back towards the Fed’s 2% target. There is a chance, however, that the hawkish tilt of the Fed may be somewhat reined in by the new members, who have shown to be fairly neutral so far and may begin to advocate for smaller rate hikes.
On balance, we see three hawkish 2022 voters being replaced by three centrist voters in 2023, including newly appointed Dallas Fed President Lorie Logan. Neel Kashkari of Minneapolis will join the ranks of voters and will presumably continue to advocate for larger and more aggressive rate increases. He and Powell could drive the consensus if inflation does not start to cool, even if it comes at the cost of economic deterioration.
Callen is a Portfolio Manager for Washington Trust Bank’s Wealth Management & Advisory Services. He is responsible for selecting and managing tax-exempt securities for Wealth Management & Advisory Services client portfolios. Callen is part of the fixed income team within the Wealth Management & Advisory Services investment team and actively works to construct tax exempt fixed income portfolios for tax sensitive clients. With his education and over 10 years of financial markets experience, Callen is able to bring valuable expertise to the fixed income portfolio management process that is designed to meet client goals.