Media coverage has focused heavily on the changes occurring within the Administration and Congress as a result of the US elections. What has not been discussed are the changes that will be occurring within the Federal Reserve’s Federal Open Market Committee (FOMC).
The FOMC is the monetary policymaking body of the Federal Reserve System. The FOMC is composed of 12 members – the seven members of the Board of Governors and five members drawn from the 12 regional Reserve Bank presidents. The Chairman of the Board of Governors, currently Janet Yellen, serves as the Chair of the FOMC; the six remaining Board of Governor members, along with the president of the Federal Reserve Bank of New York, are permanent voting members. The other four voting positions are filled on a rotating basis from the remaining presidents of the other regional Reserve Banks.
St. Louis Fed President James Bullard, Kansas City’s Esther George, Cleveland’s Loretta Mester and Boston’s Eric Rosengren make up the list of those who were voting members in 2016, but will not be in 2017. During 2016, George, Mester and Rosengren all dissented at times regarding decisions to keep rates steady, preferring instead for an increase.
In 2017, the Committee now welcomes three new regional Fed presidents who will cast votes for the first time: Philadelphia’s Patrick Harker, Minneapolis’ Neel Kashkari and Dallas’ Robert Kaplan. Chicago Fed president Charles Evans, who has been with the bank since 1991, also becomes a voter in 2017. Evans, Harker, and Kashkari all appear to favor easier monetary policy than the former voters, while Kaplan is a self-proclaimed centrist but has aligned with his colleagues’ desire to move cautiously when it comes to monetary policy.
This shift to seemingly more cautious (i.e. dovish) voting members of the committee has the potential to once again disappoint expectations for monetary policy in the coming year. Now, with voters who prefer to maintain lower rates until the Fed’s 2% inflation target is reached, the Committee’s expectation of three rate increases in 2017 could be ambitious.
Furthermore, there are currently two open vacancies on the Fed’s Board of Governors: Allan Landon and Kathryn Dominguez were nominated by President Obama in 2016, but were never confirmed by the Republican-controlled Senate, leaving the positions open for nomination by President Trump. Janet Yellen’s term as the board’s chair expires in February 2018 and vice chair Stanley Fischer’s term ends in June 2018. It’s expected that both Yellen and Fischer will retire once their terms are complete, potentially allowing President Trump to fill four of the seven seats on the Board of Governors. Most investors expect Trump to handpick officials who, in stark contrast to the 2017 voters, favor raising rates more aggressively. So, the potential exists that the Federal Reserve moves more cautiously in 2017 than their last meeting minutes implied but then shift to a more aggressive stance by the end of 2018.
Given all of the known changes in composition of Fed members, along with the potential for even further shakeup by the incoming Trump administration, we don’t appear to be nearing an end to investors’ obsession-like analysis and scrutiny of communication provided by the bank and its officials.
Some of the information and analysis for this blog post was provided by Callen Young, Senior Fixed Income Analyst.
The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this blog was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.