With Inflation Hawks Circling, Is Bernanke at Risk of a Revolt?

Ben Bernanke, captain of the worlds most powerful central bank, is attempting to stave off an all-out mutiny as he navigates through increasingly choppy economic waters and the general population grows restless.

This rising opposition was on full display last week when an alarming third member of the Federal Reserves policy-making arm dissented to Big Bens easy-money policies -- marking the highest level of dissent in almost two decades.

Analysts believe Bernanke cannot afford any more opposition. A fourth dissent against his policies would be tantamount to a vote of no confidence, a move that would rattle the financial markets and potentially spell the end of his tenure as chairman.

It is certainly close to mutiny, said Dan Greenhaus, chief global strategist at BTIG.

The growing level of dissent underscores a deep split at the Fed over the central banks course of action and reflects Bernankes more open governing style. It also threatens to erode Bernankes credibility in the marketplace at a time of great uncertainty.

Doves Struggle to Fend Off Hawks

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, surprised the markets last week by joining inflation hawks Charles Plosser of Philadelphia and Richard Fisher of Dallas in voting against the Feds unusual pledge to keep interest rates extraordinarily low until at least mid-2013.

In a sign that he knew his dissent would garner great interest, Kocherlakota explained his rationale in a rare statement. Despite increased economic anxieties, Kocherlakota said he did not feel the Federal Open Market Committees latest steps were warranted.

Since November, inflation has risen and unemployment has fallen, Kocherlakota said. I do not believe that providing more accommodation -- easing monetary policy -- is the appropriate response to these changes in the economy.

Three dissents from the FOMCs 10 voting members are highly unusual. The last time it happened was October 1992 under former Fed chief Alan Greenspan, but that opposition was split between inflation hawks and doves, unlike last weeks hawk-led resistance.

Fourth Dissent Could Indicate Revolt

While they believe it is unlikely, Fed watchers warn a fourth dissent in todays central bank would signal serious trouble for Bernanke.

Hes walking on thin ice to begin with and I think a fourth dissent would be the beginning of the call for his resignation, said Jim Rickards, senior managing director at Tangent Capital in New York. I think his credibility is at stake.

No Fed chief has faced four dissents in one meeting since Paul Volcker in February 1986. Volcker later said he considered immediately resigning, but instead stayed on until 1987 when Greenspan took over.

Unless something dramatic changes, Bernanke will likely avoid a fourth dissenter because the remaining voting FOMC members appear to be in his camp.

Bernanke still has virtually everyone else on the FOMC in his corner, said Greenhaus.

This includes core doves Janet Yellen, Bernankes No.2, and William Dudley, head of the powerful New York branch. More moderate members Elizabeth Duke and Obama appointees Daniel Tarullo and Sarah Bloom Raskin dont seem likely to jump to the other side either.

It would be an earthquake if any of them went to the dissent, said Rickards. It wouldnt be enough to change the outcome, but it would be enough to say this board is dysfunctional.

Shootout at Jackson Hole?

The financial markets, which suffered from scary turbulence last week, will be watching closely to see how this debate plays out.

When you get up to large number of dissents, the Fed starts to lose credibility and the market starts to lose confidence in policy, said David Jones, president of DMJ Advisors and a former Fed economist.

Given the pressure to avoid any new dissenters, the group of five assenting FOMC voting members essentially has a veto over Fed policy.

Interestingly, the only members of the dissenting camp are regional bank presidents.

I think that is a clear signal of a schism between the New York/Washington view and the main street view, Bill Bartmann, author of Bailout Riches, wrote in an email. When Fed presidents go public with their dissent, it is the equivalent of throwing down the gauntlet -- or drawing a line in the sand.

When they meet in Jackson Hole, Wyoming later this month for an annual summit, the FOMC members will have a high-profile opportunity to hash out their considerable differences.

Bartmann predicted a possible shootout in Jackson Hole, especially if Kocherlakota can persuade another one or two FOMC members to join his camp.

Big Ben Forging Ahead

In many ways, the rising level of dissent under Bernanke reflects his tendency to encourage debate inside the Fed, but also a struggle to meet his previously-stated goal of governing with consensus.

Greenhaus said that while Bernanke welcomes discussion among policy makers and is much more professorial than his predecessors, Greenspan was very much gravitational in that he had his view and pulled everyone towards him.

Bernanke has also opened up the Fed by holding unprecedented regular press conferences and conducting town hall summits and nationally televised interviews.

His whole leadership style was based on him being this anti-Greenspan, said Jones. He did not want to be an authoritarian chairman.

But that doesnt mean now that he is facing opposition Bernanke is likely to fold under pressure to inflation hawks and reverse course.

Bernanke is pushing ahead with what policy he sees as appropriate in the face of staunch opposition, said Greenhaus.

As illustrated by the current discussion, there are pros and cons behind Bernankes more open operating style during times of disagreement.

Its a good thing because it gives the markets more clarity, but its a bad thing because it shows its not all unicorns and rainbows, said Greenhaus.