New Hawks and Doves at Fed Likely Won't Alter Policy

Kudlow: Did Ben Bernanke Just Kill the Bull?
Travis J. Garner | Bloomberg | Getty Images

The cast of voting members on the Federal Reserve's policy committee is changing this year. Their policies probably won't be.

Chairman Ben Bernanke will likely retain a solid majority on the 12-member committee for his drive to keep interest rates low well into the future despite critics who worry about the risks. (Read More: Bernanke: 'We're Not Out of the Woods')

As the committee meets for the first time this year, Bernanke and the six other members of the Fed's board in Washington will keep their votes. So will William Dudley, president of the Federal Reserve Bank of New York. All have permanent votes. But among the presidents of the 11 other Fed regional banks, four are losing votes and four are gaining them.

On Wednesday, when the Fed issues a statement after its two-day policy meeting, economists expect it to affirm that it expects to keep short-term rates near zero until unemployment dips below 6.5 percent from the current 7.8 percent. It will also likely say it will keep spending $85 billion a month on bond purchases until the job market improves "substantially."

The Fed's goal is to keep borrowing costs low to stimulate spending and economic growth.

The rotation of the Fed's roster of voting members occurs at the start of each year. All 19 officials on the policy committee take part in the meetings, which are held eight times a year. But only 12 get to vote.

Last year, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, was the lone dissenter at each of the eight meetings. Lacker said he thought the job market was being slowed by factors beyond the Fed's control. He also argued that further bond purchases would risk worsening future inflation.

With Lacker no longer a voting member, the Fed's policy decisions might be unanimous. But it isn't certain. Some others on the committee have also expressed concern that the Fed's low-rate policies could fan inflation or encourage speculative buying of assets like real estate or stocks.

The one official most likely to dissent this year from the Fed's easy-credit policies is one of the new voting members: Esther George, president of the Federal Reserve Bank of Kansas City. Like Lacker, George is known as a "hawk."

Among economists and Fed-watchers, hawks are those who tend to worry that interest rates kept too low for too long could escalate inflation or fuel asset bubbles. By contrast, "doves" place a higher priority on boosting the economy and reducing unemployment.

In a speech this month, George said the Fed's policies were making her uneasy. She said the central bank "must not ignore the possibility" that its interest rate policies could contribute to asset bubbles that could harm the financial system.

"Esther George could be the new dissenter," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "There is a history of that from the Kansas City Fed." At the Kansas City Fed, George succeeded Thomas Hoenig, who had often dissented from Fed policies he thought raised the risk of inflation.

The three other regional bank presidents who are gaining votes this year are Charles Evans of the Chicago Fed, Eric Rosengren of the Boston Fed and James Bullard of the St. Louis Fed.

Bullard's views are seen as middle of the road. But some analysts suggest that after George, Bullard would be most likely to dissent from a Fed vote out of concern that its policies might trigger high inflation.

By contrast, Evans is considered the Fed's most dovish official. Last year, Evans persuaded his fellow committee members to change the way the Fed provides guidance on its interest-rate policies to investors, consumers and businesses.

In December, the Fed did so: It scrapped the calendar dates it had been using as targets for when the first short-term rate increase might occur. Instead, the Fed said it would link its actions to specific economic markers. It said it expects rates to stay low at least until unemployment drops below 6.5 percent as long as inflation remains tame.

Many economists don't expect unemployment to dip below 6.5 percent until late 2015. The Fed said it could pursue aggressive stimulus programs as long as its one- to two-year outlook for inflation doesn't top 2.5 percent. Inflation according to a measure used by the Fed is running at an annual rate of 1.7 percent.

That's why most economists think Bernanke will have no trouble gathering the votes needed to maintain the Fed's stimulative efforts.

The minutes of the December policy meeting showed that some officials felt it might be appropriate to scale back the Fed's bond purchases or end them outright before the end of 2013. Still, most analysts think the Fed will maintain the level of its bond purchases for the rest of this year, unless the unemployment rate falls much faster than expected.