The Annual Rotation Ritual: Does It Really Matter?

At the first meeting of each year, the voting status of most regional Fed presidents changes, which always  raises the question of whether the rotation in a given year makes the FOMC more or less dovish. Our  conclusion for 2017: The set of voting presidents is a bit more dovish, but the rotation matters more for  dissents than for the decisions of the Committee. Still, the Chair always has an eye on the potential number  of dissents to his or her policy recommendation. Note that the cast of FOMC participants will also change  this year as a result of the filling of the two vacant seats on the Federal Reserve Board, and other seats  could become available if one or more current governors leave. In addition, there will be new presidents at  the Atlanta Fed (this is Lockhart’s last meeting) and the Richmond Fed (Lacker will leave in October).  Neither of those Banks has a voting member of the FOMC in 2017. The bottom line is that the rotation of  presidents will not affect the policy decisions of the FOMC this year. 

Table 1 shows the rotation of presidents on the FOMC this year: 

What’s a “dove” and a “hawk”? 

  • To assess whether the rotation makes the Committee more or less dovish, we must make a judgment about who the doves and hawks were in 2016 and are in 2017. 
  • But the first step is to define what we mean here by doves and hawks.  
  • Here we apply a very specific, pragmatic definition: A dove is someone more likely to counsel patience and want a pace of hikes in 2017 more gradual than that implied by the median dots; a hawk is someone who wants more hikes than the median. Those at the median are centrists.  

We just named the dots for December! We use these dots to identify the doves and hawks in 2016  and 2017 among the rotating presidents. 

  • In terms of our naming of the dots, last year there were three presidents who were hawks and had votes: George, Mester, and Rosengren. We see all as having put down dots in December 2016 that implied four or more moves in 2017. Each also has dissented at least once. There was one voting president who was a “dove,” Bullard (based on his view of the equilibrium funds rate and the number of moves needed to get there). 
  • This year, there are two doves, Kashkari and Evans, at two moves in 2017, and two centrists, Harker and Kaplan, at three moves in 2017. I would note, however, that Evans is currently closer to a centrist  (and may indeed qualify as one) and Harker had been hawkish in his communications all last year.
  • Therefore, the rotation has moved the Committee in a more dovish direction. 

Let’s make an effort to assess how much more dovish the FOMC is by adding up the number of moves this  year, based on our naming of the December dots, for presidents who were on the Committee last year and  those this year. 

  • Of those on the Committee last year, we have three at four hikes in 2017 and one at one, for a total of  13.  
  • For 2017, we have two are at two moves and two at three moves, for a total of ten.  ▪ Like I said, a more dovish set of presidents this year! 

Does it matter? 

  • The change in the dovishness of the rotating presidents can make a difference to some extent, but perhaps less of a difference than I suspect many think. The change matters more for the number of dissents than for the decision made at a meeting. 
  • We view the Chair, at least in the Bernanke and Yellen years, as focused on building a consensus among all participants, not just among the voting members. 
  • Voting members nevertheless get some additional influence, because only those voting can dissent, and the Chair is always attentive to the potential number of dissenters for any recommendation.
  • Still, in our view, one or even two dissents would not shift the balance away from the consensus among participants. 
  • But avoiding three dissents is very much on the mind of a Chair, and, to my surprise, we have seen three dissents a couple of time in the last couple of years (George, Mester, and Rosengren at the  September 2016 meeting and Kocherlakota, Fisher, and Plosser at the December 2014 meeting). But even three dissents, while undoubtedly much regretted by Yellen, have not appeared to affect the decisions. 

In viewing the influence of new voters on the Committee, one might also take into account their relative  propensity to dissent. Some have an ingrained higher propensity to dissent than others, but the propensity  to dissent in any case increases with the distance between their views of appropriate policy and the  consensus. 

  • George has, for example, revealed a high propensity to dissent, all hawkish dissents. We refer to her as a super hawk, reflected in her being far away from the consensus for 2017. However, she doesn’t vote in 2017.
  • Mester and Rosengren also revealed a willingness to dissent in 2016, both with hawkish dissents, and in both cases, their dots for 2017 are consistent with more hikes than the consensus. They rotate off the Committee this year. 
  • Kashkari of course does not have a voting record yet, but his comments last year reveal that he is one of the most dovish participants, and we expect he is below, may be far below, the median dot for 2017.  He is a potential dissenter in 2017. 
  • Evans could go along with two or three moves in 2017 at this point. In any case, he is closer to the median dot, and so we see him as having a lower propensity to dissent this year. 

We will address the implications of the changing composition of the Board in a separate commentary. 

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