Tug of War at the Fed

Journal pulls back the curtain

The Wall Street Journal does good work today with a fascinating behind-the-scenes look at the August 10 meeting of the Federal Open Market Committee.

Jon Hilsenrath reports that the meeting “was among the most contentious in Ben Bernanke’s four-and-a-half year tenure as central bank chairman,” and he’s got lots of nice details to back that up, plus a clear explanation of just what the Fed was considering, and context to help readers make sense of it all.

Here’s a quick highlight:

With the economic outlook unexpectedly darkening, the issue was a seemingly technical one: whether to alter the way the Fed manages its huge portfolio of securities.

But it had big implications: Doing so would plunge the Fed back into the markets and might be a prelude to a future easing of monetary policy, moves that divided the men and women atop the central bank.

At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.

OK. I’m a sucker for furniture. But Hilsenrath brings a lot of other strong reporting to the piece. There’s everything from growing concern at the New York Fed about the way its portfolio of mortgage-backed securities was shrinking more quickly than expected to the fact that the FOMC meeting started early and ended late.

But what really got the attention of Fed watchers was the way the piece details who was where in the debate, and what those stances mean for future Fed actions.

Here’s Mark Thoma’s reaction to the piece:

My view is that it will take even more bad news about the economy before the Fed will consider additional moves, and if it does move, it will move gradually.

The Fed has been behind the curve since before the crisis started. It didn’t see the crisis coming, when the crisis did come it was going to be contained rather than spread and cause bigger problems, and when the problems spread they were going to be short-lived — Bernanke saw green shoots long, long ago. Now we have Fed officials hesitating once again based upon their relatively rosy expectations for the recovery.

Joe Weisenthal at Money Game takes a very similar view:

There are a lot of moving parts to the story because there are different reasons for the objections. Some of the Fed governors are hawkish (like Hoenig). Some are more dovish (like Bullard). And some think that the Fed can’t really do anything because our problems are more structural (Kocherlakota).

But here’s what folks are taking away from the article: The Fed is still way behind the curve in terms of how bad the economy is. It’s paralyzed.

And Matt Yglesias sees the story as an occasion to reprise his call for more attention to—and action on— President Obama’s Fed nominees.

The Journal piece tries a bit too hard to use Bernanke’s time as chairman of the Princeton economics department (“when he had to manage a collection of argumentative academics with strong personalities and often divergent views”) to explain his management style.

And, with all its deep reporting, I wish the story had slowed down just a little bit more to explain how voting really works at the FOMC.

We’re told that Bernanke is “comfortable with democracy around the Fed. His view is that is going to help him get to a better judgment.” And there’s this:

After listening intently, Mr. Bernanke summed up the debate, acknowledged the disagreements, and then said that the Fed shouldn’t allow the passive tightening of financial conditions that was being caused by its shrinking balance sheet. In practice, that would mean taking proceeds from nearly $400 billion in maturing mortgage bonds and buying Treasury debt. The Fed also needed to acknowledge the slower growth outlook, he said. The meeting ended later than usual.

The formal vote—9 to 1—disguised the disagreements. Both Mr. Warsh and Ms. Duke voted with the chairman. So did vice chairman Donald Kohn, governor Daniel Tarullo and four of the five regional Fed bank presidents who have votes this year: Mr. Dudley, Mr. Rosengren, St. Louis’ James Bullard and Cleveland’s Sandra Pianalto. Mr. Hoenig, as he has at every opportunity this year, formally dissented.

Does that mean that the chairman just twisted some arms, and we shouldn’t pay attention to those formal vote tallies? Is it all a test of Bernanke’s power—and proof that he’s still in charge? A bit more on that aspect of the tale might help readers sort through the Fed’s mysterious maneuverings.

But mostly well done to the Journal for shining some light on this powerful institution.

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Holly Yeager is CJR's Peterson Fellow, covering fiscal and economic policy. She is based in Washington and reachable at holly.yeager@gmail.com.