As the New Year approaches, the Federal Open Market Committee will do its annual shuffling and rotating of voting members. It also brings Christopher Waller, executive vice president of the Federal Reserve Bank of St. Louis, as Fed governor who analysts believe will create a more "centered" FOMC.
Each member of the FOMC has different views, of course, with some being more hawkish and others more dovish, thus changing the makeup of how votes will shake out in 2021.
Greg Staples, head of fixed income at DWS believes that Waller’s addition will bring his “strong” research background in macroeconomics and monetary policy, given his prior role.
“He is likely to settle in as a moderate on the hawk/dove spectrum, very much aligned with the Chair Jerome Powell, and the Vice Chair Richard Clarida,” he said. “As for the annual rotation of voting Regional Fed Presidents, we see the incoming group of 2021 voters a bit more centered than those of 2020. Dove Neel Kashkari, and somewhat hawkish Loretta Mester, both leave the voting group for 2021, and their departures may offset. We see incoming voters Charles Evans, Thomas Barkin, Raphael Bostic, and Mary Daly as all being centrist. So the center has not shifted, but the wings may pull in a bit.”
While there is always some change in the dynamic of the voting, all Federal Reserve Bank presidents attend the FOMC meetings and have an opportunity to express their views, according to Steve Skancke, chief economic advisor at Keel Point.
“During 2020 and 2021, FOMC focus is on supporting a recovering economy and assuring that interest rates and credit markets are supporting employment and economic growth. There has been a strong consensus on policy, and differences have been more as to timing and nuance, and so the rotation of four of the FOMC voting members is not expected to make any difference.”
Skancke added that the FOMC has observed that “disadvantaged labor groups historically are last in line to benefit from employment and wage growth and that keeps monetary policy expansive.” In other words, the goal is low interest rates and growing money supply will continue until the benefits of the economic recovery are widely distributed.
“And this is consistent with views expressed by new Fed Governor Waller and also by 2021 FOMC voting Atlanta Fed President Dr. Raphael Bostic, who also has been mentioned as a possible replacement as Fed Chair in 2022 when Jerome Powell’s term as Fed chair expires,” he said.
William English, professor in the Practice of Finance at the Yale School of Management, feels that generally, the rotation of membership does not have a “significant effect” on policy.
“Since all of the Committee participants (all of the Reserve Bank presidents and members of the Board of Governors) attend the meetings in any case and get to express their views and make their arguments, the meeting discussion and decision won’t change appreciably as a result of the rotation,” he said.
English said he believes the members rotating in and out in 2021 are both “smart and solid” groups, reflecting a “good mix” of views, reinforcing the notion that this rotation won’t have significant effects on Fed policy decisions.
“Governor Waller is another smart, solid economist with generally centrist views on monetary policy and Fed independence, so I wouldn’t expect him to shift the center of the Fed’s decision making either,” English said. “It’s a large Committee, so one person can’t move it very far in any case.”
Waller, prior to joining the Federal Reserve Board of Governors back on Dec. 18, was most recently director of research at the Federal Reserve Bank of St. Louis.
"Chris Waller’s appointment to the Fed Board of Governors should further reinforce the current orientation toward low rates and easy financial conditions," said Eric Kelley, executive vice president and managing director, research at UMB Bank. "Having served as director of research at the St. Louis Fed, specializing in Monetary Theory, he appears to be in full support of the Fed’s pledge to keep rates on hold for the foreseeable future and he should help bolster the Fed’s commitment to do 'whatever it takes' to push the economy back to a more normal growth pattern."
One thing is clear to Skancke and that is over the past dozen or so years, appointments and confirmations of Fed governors have become “increasingly political.”
“The confirmation of Christopher Waller as a Fed Governor earlier this month is the latest example, as Waller was nominated at the same time as Judy Shelton to fill the governor vacancies,” he said. “Shelton’s views on the Fed, monetary policy and returning to the gold standard were controversial and generated opposition within the economist community and across party lines in the U.S. Senate. As a result, Waller’s confirmation was also delayed and when voted on separately by the Senate was still tightly along party lines.”
Skancke added that Waller is believed to favor keeping interest rates low when inflation is muted and not viewed as an "imminent threat to price stability." His joining the Fed and becoming a permanent/non-rotating member of the FOMC is "not likely to have a material impact on FOMC."
"The FOMC has expressed and re-confirmed its plans to keep interest rates low until the economy is well on its way to recovery and an average of inflation rates over time has risen to at least 2%,” Skancke said.
Kevin Flanagan, head of fixed income strategy at WisdomTree, agreed, adding that this addition appears to be a “non-headline.”
“With the addition of newly confirmed [Waller], the FOMC is now just one member short of filling the voting membership to its full capacity of 12,” Flanagan said. “Given his background and recommendation by St. Louis Fed President Bullard, Governor Waller would appear to be a ‘non headline-making’ addition to the Committee. In terms of potential ‘Fedspeak’, in my opinion, the triumvirate of Fed Chairman, Vice Chairman and NY Fed President are the three individuals to follow closely for hints of ‘official’ policy pronouncements.”
For background, the FOMC is the Fed’s monetary policy making body and is made up of the seven Fed governors and five of 12 presidents of the regional Federal Reserve banks. The president of the New York Fed is a permanent member with the remaining 11 Fed bank presidents having rotating one-year terms.
The 2020 terms of the presidents of the Philadelphia, Cleveland, Dallas and Minneapolis banks will rotate in 2021 to the presidents of the Richmond, Chicago, Atlanta and San Francisco banks.
Initial claims
Initial jobless claims fell to a seasonally adjusted 787,000 in the week ended Dec. 26 from the previous week's revised level of 806,000, originally reported as 803,000, the Labor Department said Wednesday.
The four-week moving average climbed to 836,750 in the week ended Dec. 26 from 819,000 a week earlier, originally reported as 818,250.
