The Decline of Dissent at the Fed
Last Modified: 01:21 AM, Fri Mar 25, 2016

By Jon Hilsenrath

The Wall Street Journal. 25 March 2016, Pages: C1

Word Count: 870

Includes remarks from Rob Kaplan

Dallas Fed President Robert Steven Kaplan is part of a widening consensus taking root inside the nation's central bank on interest rates.

During much of the postfinancial-crisis era, many regional Fed bank presidents challenged views coming out of the Federal Reserve Board in Washington about monetary policy. Now, Fed Chairwoman Janet Yellen has more of the institution marching behind her in agreement with her strategy of raising rates slowly in the months and years ahead.

A more cohesive Fed can make it easier for markets to read where policy is headed but can raise the risk of officials thinking so much alike that they miss new threats to the economy, some analysts said.

Mr. Kaplan, a former Harvard Business School professor and Goldman Sachs Group Inc. executive, in an interview with The Wall Street Journal, positioned himself as a centrist among Fed policy makers, ready to keep raising short-term interest rates, but closely aligned with Ms. Yellen in a desire to proceed with caution.

His approach stands in contrast to his predecessor, Richard Fisher, who retired last year after 10 years as a colorful and outspoken "hawk" who resisted the Fed's easy-money policies, which he likened to heroin.

The Fed needs to keep raising short-term interest rates to diminish risks to the economy and markets of "excessive accommodation," Mr. Kaplan told the Journal on Monday. However, fragile and interconnected financial markets, slow global growth, and the perils of driving the economy back into recession all mean the Fed can't move aggressively, he said.

"We want to try to normalize [interest rates] as fast as we can," Mr. Kaplan said in a Dallas office stuffed with memorabilia from his home state of Kansas and with management "how-to" books he wrote. "But we have to be patient and gradual."

Mr. Kaplan hasn't yet been a voting member of the Fed's rate-setting committee, but said he has agreed with every decision Ms. Yellen has led in the five policy meetings he has attended since last year. Mr. Fisher dissented on nine policy decisions in 10 years at the Fed, about 30% of the time he had chances to vote.

The Fed has held its benchmark short-term rate between 0.25% and 0.5% since December, when it raised the rate from near zero after holding it there for seven years.

Ms. Yellen has adopted and built on the consensus-oriented style of her predecessor, Ben Bernanke. Despite signs of division in recent months, the institution is largely in agreement on the likely path of rates.

Looking ahead to 2018, officials see rates rising to somewhere in a narrow range between 2.125% and 3.875%. When Ms. Yellen took the job in 2014, the officials' projections three years out varied much more widely, between 0.75% and 4.25%.

In addition to Mr. Fisher, the other policy outliers who have left the Fed in the past year are Charles Plosser, the former Federal Reserve Bank of Philadelphia president who also opposed easy money, and Narayana Kocherlakota, the former Minneapolis Fed president who advocated more aggressive easy-money policies. Mr. Plosser's successor, Patrick Harker, has expressed centrist policy views. Mr. Kocherlakota's successor, Neel Kashkari, has publicly challenged Ms. Yellen on bank supervision but not monetary policy.

"She has got less people to contend with and less people who are going to oppose taking policy in a dovish direction," said Michael Feroli, chief U.S. economist for J.P. Morgan Chase & Co.

Ms. Yellen courts input from all 17 officials before policy meetings, scheduling face-to-face discussions and phone calls before gatherings officially start. In two years on the job, she has faced nine dissents, including just two in the past 10 meetings. Mr. Bernanke faced 48 dissents in eight tumultuous years.

As a former investment banker at Goldman Sachs, where he spent 23 years until 2006, Mr. Kaplan seeks to position himself in the Fed as an expert on financial markets.

This is another potential challenge. Four of the 12 regional Fed bank presidents were affiliated with Goldman before joining the Fed, feeding public perceptions that the central bank is too close to big banks bailed out during the financial crisis.

"Judge me on the merits of how well I serve the nation and the district," he said.

Financial-market conditions are one reason Mr. Kaplan wants the Fed to go slow on rates. Because they are so interconnected, shocks in China are spilling out to the rest of the world and creating market turbulence that restrains the U.S. expansion.

Globalization of labor markets, he said, is a long-running downward weight on inflation and wages. "I don't think it's an option to just think domestically. You have got to think globally," he said.

Like Ms. Yellen, he isn't convinced inflation is on an upward trend, despite signs of a pickup.

Inflation has run below the Fed's 2% target for 45 months in a row, a factor keeping the central bank from raising rates aggressively.

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Article Info
Publication: The Wall Street Journal
Organization: Federal Reserve Board, The Goldman Sachs Group Incorporated
Location: Texas
Industry: Central Banking, Banking, Banking/Credit, Financial Services, Financial Investments, Investment Banking, Investing/Securities
Interest Rates, Monetary Policy, Central Bank Intervention, Economic News, Government Bodies, Political/General News, Politics/International Relations, Domestic Politics