Published December 11, 2012
CHICAGO – The Federal Reserve may tip toward doing even more to boost the U.S. economy in 2013 as two outspoken advocates for a super-easy monetary stance rotate into voting spots on its policy panel.
The annual shuffle of voters also raises the possibility of more dissents, analysts said, but not enough to offset the small but noticeable dovish shift.
Incoming voters Charles Evans, who leads the Chicago Federal Reserve Bank, and Eric Rosengren of the Boston Fed have argued that the central bank needs to go beyond its already aggressive easing of monetary policy to bring down unemployment.
They are also at the forefront of efforts to adopt numerical thresholds for unemployment and inflation that would underscore the Fed's willingness to keep policy easy for a long, long time.
The new lineup, which will be in place for the Fed's first meeting of 2013 in late January, "tilts slightly more in favor of further accommodation," said Michael Gapen, an economist at Barclays, in New York.
The Fed has kept interest rates near zero since December 2008 and expects to keep them there until at least mid-2015. It has also bought $2.3 trillion in long-term securities and is expected to announce more purchases on Wednesday after a two-day meeting.
Next year, it will wrestle with the question of just how far it should go.
GEORGE TO TAKE UP BATON OF DISSENT?
Each January, four regional Fed bank presidents rotate into voting spots on the policy committee and four rotate out.
This year, Richmond Fed President Jeffrey Lacker made his discomfort with the central bank's easy stance known with dissents at every meeting.
He will be rotating off the voting roster, as will Cleveland Fed President Sandra Pianalto, Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams.
Kansas City Fed President Esther George, who next year will cast her first votes since succeeding Thomas Hoenig in the job in 2011, could take up the baton of hawkish dissent.
While she has been less openly critical of current policy than Hoenig, who used all of his final votes to dissent against Fed easing, George has sounded a couple of skeptical notes.
"Only time will tell if George will assume the role of 2013 voting hawk," said Neal Soss, Credit Suisse economist in New York.
St. Louis Fed chief James Bullard, who has said he would have voted against the central bank's decision in September to embark on a new round of asset purchases, is also joining the voting ranks. In his last go-round in 2010, he voted with the consensus at every meeting.
"Bullard is a wild card, and so that might make the votes a little less predictable than they are in the current lineup," said JPMorgan's Michael Feroli.
And Evans could cast a dovish dissent - as he did during his last voting stint in 2011 - should the Fed pare asset purchases too early for his taste, some analysts said.
To be sure, the economic recovery does not appear to be gaining enough traction for the Fed to cut back any time soon.
In a Reuters poll on Friday, the median forecast of 32 economists was for the Fed to buy a total of $515 billion of Treasuries as part of the expanded purchase program expected to be announced this week.
"Given the environment that we are looking at ... I don't know that any of the hawks will have a strong argument because growth is likely to be slowing, and inflation is cooling," said Mark Vitner, an economist at Wells Fargo, in Charlotte, N.C.
WILL EVANS, ROSENGREN HELP ON THRESHOLDS?
Meanwhile, officials continue to debate whether to adopt numerical thresholds for unemployment and inflation to help guide their decision on when to eventually raise rates.
Both Evans and Rosengren have said the Fed should keep rates low until the jobless rate falls to at least 6.5 percent unless inflation heats up. The unemployment rate dropped to 7.7 percent in November from 7.9 percent in October, but only because thousands of Americans stopped looking for work.
It is unclear how far Evans' and Rosengren's status as voters will nudge the needle for the committee as a whole, although 33 of 55 economists polled on Friday said the Fed would eventually adopt thresholds.
"Thresholds will be a front-burner issue and will likely get done in 2013," said Eric Stein, a portfolio manager at Eaton Vance, in Boston.
Fed Chairman Ben Bernanke and Vice Chair Janet Yellen have both already indicated support for the threshold idea.
But Bernanke probably would want broad backing for such a significant change in the Fed's policy framework. When officials adopted an inflation goal of 2 percent this past January, all regional Fed bank chiefs were afforded a say.
"To make credible long-run programs, (Bernanke) wants a broader consensus, not just the voting members," said former Fed Governor Randall Kroszner, a professor at the University of Chicago Booth School of Business.
(Reporting by Ann Saphir; Editing by Tim Ahmann and Jan Paschal)