A fear of dissent haunts the Federal Reserve
Summary
The FOMC too often speaks with one voice, an oddity in its history and for central banks globally.
This week’s Federal Open Market Committee meeting is notable for two things. America’s central bank is shifting into monetary-easing mode amid considerable uncertainty about the true state of the economy, prospects for inflation and even the mechanisms by which Federal Reserve policy affects Main Street. And despite all these complex unknowns, almost everyone on the committee agrees.
Commentary on the meeting is focusing on that “almost." A member of the Fed’s Board of Governors dissented from the FOMC’s decision to cut its target short-term interest rate by half a percentage point. Gov. Michelle Bowman would have preferred a quarter-point cut. It’s the first time since September 2005 that a member of the Fed’s Washington-based board has disagreed formally with a policy decision.
In some quarters this is being presented as a sign of growing internal disagreement, but this rare and limited dissent is a reminder that American monetary maestros agree with each other far too often. This is especially the case among members of the Fed’s governing board: The last dissenting vote from a governor before September 2005 came in September 2002, and the one before that was in November 1995.
Instead, the FOMC has come to rely for intellectual diversity on the presidents of the 12 regional Federal Reserve Banks. The president of the New York Fed always gets a vote, and the others take year-long turns filling four slots alongside the seven Fed governors in voting on the FOMC. Regional bank presidents cast dissenting votes more often than members of the Board of Governors, but often they cast a lone contrary vote. The last time two regional bank presidents voted against an FOMC decision was in September 2020, when Robert Kaplan and Neel Kashkari disagreed with the wording of the statement but not the policy.
This of-one-mind attitude is deeply embedded. An FOMC decision hasn’t clocked three dissents since September 2019, and the last time four FOMC members voted against anything was October 1992.
We’ve become so accustomed to this consensus that we forget how unusual it is. The Bank of England’s Monetary Policy Committee in its July meeting this year started its own monetary easing cycle with a quarter-point interest-rate cut. The vote: five in favor of the easing against four opposed. The Bank of Japan this year has seen two dissents among the nine voting policymakers at each meeting in which the central bank announced new steps toward policy normalization.
The U.S. central bank’s recent near-unanimity isn’t normal by the Fed’s standards, either. The American (and global) economies face unprecedented challenges both near- and long-term. Conventional economic models plainly are inadequate, having missed the worst-in-40-years inflation as it loomed and incorrectly predicted how the disinflation after would unfold.
Similar eras of economic turmoil triggered golden ages of Fed dissent, as a 2014 paper by St. Louis Reserve Bank economists noted. The Arthur Burns-G. William Miller-Paul Volcker era in the 1970s and ’80s witnessed a higher average level of dissenting votes per FOMC meeting than at any time in Fed history up to then, and it wasn’t unheard of to see four or even five opposing votes at a meeting. The extraordinary experimentation of the Ben Bernanke era triggered a new bout of dissent, although not at the same level. Yet the Fed expects us to believe our leading policymakers mainly agree about how to manage monetary policy in today’s unprecedented environment?
Obviously they don’t, at least outside the meetings. Speeches from Fed officials often hint at a diversity of views about the economy and monetary policy, and rumors surrounding FOMC meetings suggest these views get an airing in the conference room. Yet the Fed, and its chairmen, have grown resistant to airing those disagreements when it counts—in policy votes where there is some accountability to the public for a member’s position. There the emphasis shifts to achieving an appearance of consensus.
Several factors may explain this. The Fed seems skittish about the idea that the children on Wall Street might see the parents arguing in Washington. The process of selecting new Fed governors has become downright vicious toward anyone who holds contrary views on the proper means and ends of monetary policy, as the nomination wars of the Trump era showed, making it easier to achieve a consensus in the end.
Whatever the reason, this is unhealthy—and dangerous to the Fed’s credibility and independence. Voters might well start to wonder why their central bank isn’t hosting a more open debate about its recent errors and how to remedy them. Meanwhile, if the Fed can’t demonstrate a capacity for vigorous internal dissent, politicians may conclude they must force such a debate on the bank via greater political meddling.
The economic stakes are too high for the Fed to retreat into its now customary near-consensus. They owe it to the rest of us to argue with each other more.
