The Fed is making difficult decisions right now, and it’s good to see dissent out in the open.
The Federal Open Market Committee, the monetary policy-setting arm of the Federal Reserve, voted 9–2 on Wednesday to keep the federal funds rate at 4.25 to 4.5 percent. FOMC decisions are usually unanimous, and this was the first time there has been more than one dissenting vote since 1993. Governors Chris Waller and Michelle Bowman wanted a 0.25 percentage point rate cut.
Press coverage has highlighted the disunity. It’s not really a big deal. It is little more than a superstition to believe that central bank decisions must be unanimous.
It’s not an entirely unreasonable one. It would seem to make some sense that a unanimous FOMC would send a more powerful signal to markets than a fractured one, and most of the FOMC’s job is to send signals and communicate clearly and effectively.
At the same time, it is a committee for a reason. If everyone on a committee thinks the same thing all the time, then there’s no point in having a committee. Committees are supposed to be places for discussion, and for dissent when necessary.
The Monetary Policy Committee, the equivalent to the FOMC in the Bank of England, frequently has dissenting votes when setting interest rates for the U.K. It remains a respected institution with credibility in markets.
There has been plenty of faux unanimity in the FOMC’s past, where members disagree in private but then vote as a bloc in public. This is a form of lying, and there’s no particular reason to believe it is a noble lie.
Markets treated today’s 9–2 decision as no big deal. It’s not a problem to take disagreements about monetary policy public. A study of European Central Bank decisions by three French economists, published as a working paper by the Bank of France, found a negative effect on stock prices when monetary-policy decisions were not unanimous. That, too, is nothing to be worried about, because it communicates valuable information about the uncertainty in policymaking.
Thomas Hoenig is probably the most famous FOMC dissenter. He was the lone dissenting vote for eight FOMC decisions in 2010, serving on the committee as the president of the Kansas City Fed. In a speech in 2011, Hoenig said, “The idea that a dissenting vote is confusing, counterproductive, and generally undesirable is unhealthy.”
The Federal Reserve System’s structure is based on the idea of a diversity of viewpoints. That’s why, unlike any other country’s central bank, it is composed of regional banks. Banks in different regions deal with different industries and economic circumstances, and it makes sense that they don’t all think the same about what the right monetary policy is.
The FOMC is also structured to value multiple viewpoints. The seven members of the board of governors, appointed by the president and confirmed by the Senate, are complemented by five of the twelve regional bank presidents, hired by the directors of their banks. These roles have different purposes in the system, and members have different backgrounds and experience. Some are more academically inclined, and others come from industry.
“In this structure, it is a key point to remember that each member was given a vote, not an advisory role,” Hoenig said. Dissenting votes used to be more common in the past, he noted, and there’s no reason to pretend that everyone is certain about an always uncertain future.
The New York Times’ reporting on the rate decision summarized three different camps on today’s FOMC:
Mr. Waller and Ms. Bowman sit on one end of the spectrum, arguing that the labor market is flashing warning signs that the Fed should not ignore. They also assert that price pressures just now starting to bubble up because of the levies Mr. Trump imposed on the country’s biggest trading partners will fade over time.
On the other end is a sizable group of policymakers much more concerned about inflation and hesitant to lower interest rates until there is tangible evidence that the labor market is weakening. As of projections released at the last meeting in June, seven of the 19 officials forecast the Fed standing pat the rest of the year.
Occupying the middle ground are centrists who see a path to lower borrowing costs perhaps as early as September, but want to gather more data before shifting off the wait-and-see stance that has guided the central bank since January.
I’m in the second camp at this point, but all three views are reasonable. FOMC members aren’t idiots, and despite all the wailing from politicians, they by and large don’t reason based on partisanship or whether they like Trump. There’s no reason to pretend that these divisions don’t exist, and when members disagree with the chairman, they should vote against him.
“A deliberative body does not gain credibility by concealing dissent when decision making is most difficult,” Hoenig said in his 2011 speech. The Fed is making difficult decisions right now, and it’s good to see dissent out in the open.