WILL THE ROTATION TO NEW FOMC MEMBERS IN 2016 IMPACT FED POLICY?
The FOMC consists of 19 members: 12 voting members and 7 nonvoting members. The 19 members are the presidents of each of the 12 regional Federal Reserve Banks (Boston, New York, Philadelphia, Richmond, etc.) and the 7 members of the Board of Governors of the Fed. The 7 board members include Fed Chair Yellen and Vice Chair Stanley Fischer.
At the start of 2016, the president of the Boston Fed, Eric Rosengren, a policy dove, replaced Richmond’s Jeffrey Lacker, a hawk (please see Figure 3 for a description of hawks and doves). Cleveland’s Loretta Mester replaced Chicago’s Charles Evans in a hawk-for-dove swap. The president of the St. Louis Fed, James Bullard, a hawk, replaced dove Dennis Lockhart (Atlanta) at the start of 2016, and Kansas City’s Esther George, who is also a hawk, replaced the dovish John Williams of San Francisco [Figure 3].
While the regional bank presidents that rotated onto the FOMC as voters at the start of 2016 are, in aggregate, more hawkish than the regional bank presidents who left, dissents are relatively rare, and the returning voting members of the Fed Board of Governors are likely to continue to vote with the chair and vice chair on monetary policy. Thus, even the net addition of perhaps two additional hawks to the FOMC in 2016 may not substantially alter the course of monetary policy this year.
DOES THE FED CHANGE MONETARY POLICY IN AN ELECTION YEAR?
The short answer is yes, despite misconceptions the Fed stands down before major elections. While the Fed often pauses in the month or so prior to the November election, the Fed has changed policy (either raised or lowered rates or stopped or started quantitative easing [QE]) in every election year since at least 1968, and we don’t expect anything different in 2016.
WILL THE ELEVATED VOLATILITY IN THE MARKETS DETER THE FOMC FROM RAISING RATES?
In general, the Fed as an institution and the individual members of the FOMC have a much higher threshold for financial market volatility than financial market participants, investors, and the financial media. There is no question that global financial markets have seen wild swings so far in 2016, with the S&P 500 falling 12% in the first few weeks of 2016, rallying by 7%, and retesting the lows of the year in mid-February 2016, before rallying 12% in the past month. Other markets (commodities, Treasuries, etc.) have seen similar swings.
Although the Fed clearly monitors activity in financial markets, it rarely, if ever, cites financial market weakness as a reason to change monetary policy. The FOMC statement released this week will probably acknowledge the recent market volatility, but keep it in perspective, and will likely point out that recent data on the labor market have been solid and inflation expectations — a key metric for the Fed — have stabilized despite the recent drop in oil.