credit suisse, us economics digest, jan 12, 2014. "the 2014 fomc - new faces, same taper"
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With the Senate confirmation on January 6 of Janet Yellen as Fed Chair and with President Obama’s three Fed Governor nominations this past Friday, the omposition of the 2014 FOMC is finally taking shape. However, even as its membership is being revamped, the Committee’s policy approach likely will look very familiar.TRANSCRIPT
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US Economics Digest
The 2014 FOMC – New Faces, Same Taper
With the Senate confirmation on January 6 of Janet Yellen as Fed Chair and
with President Obama’s three Fed Governor nominations this past Friday, the
composition of the 2014 FOMC is finally taking shape. However, even as its
membership is being revamped, the Committee’s policy approach likely will
look very familiar.
We expect the FOMC to continue along the $10bn/meeting tapering path laid
out by Chairman Bernanke on December 18, the latest disappointing jobs
data notwithstanding. And forward guidance on interest rate policy probably
will keep gaining prominence as quantitative easing is wound down.
Former IMF First Deputy Managing Director and Bank of Israel Governor
Stanley Fischer has been nominated to assume the vice chairmanship of the
Federal Reserve Board. Lael Brainard, formerly with the US Treasury, has
been tapped for Fed Governor Elizabeth Duke’s vacated seat. And Fed
Governor Jerome Powell has been offered a full, 14-year term after he serves
out an unexpired term.
These changes all come against the backdrop of the annual rotation of district
bank presidents into voting seats on the FOMC. The 2014 bank president
voting contingent is likely to be more hawkish than it was in 2013.
In this research note, we discuss the views of the two new FOMC nominees.
We also provide our hawk/dove scale from January 10, presenting our
rankings of the policy predispositions of those officials expected to join the
FOMC soon.
Exhibit 1: The Federal Open Market Committee in 2014
Credit Suisse forecasts (after the January 28-29 FOMC meeeting)
Board of Governors* District Bank Presidents
Janet Yellen, Fed Chair Boston (Eric Rosengren)
Stanley Fischer, Fed Vice Chairman New York (William Dudley), FOMC Vice Chair*
Daniel Tarullo, Fed Vice Chairman for Supervision Philadelphia (Charles Plosser)*
Jerome Powell Cleveland (Sandra Pianalto's successor)*
Jeremy Stein Richmond (Jeffrey Lacker)
Lael Brainard Atlanta (Dennis Lockhart)
Vacant Chicago (Charles Evans)
St. Louis (James Bullard)
Minneapolis (Narayana Kocherlakota)*
Kansas City (Esther George)
Dallas (Richard Fisher)*
San Francisco (John Williams) Source: Federal Reserve, Credit Suisse * = Voting member in 2014
Research Analysts
Neal Soss
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Dana Saporta
212 538 3163
Nimrod Mevorach
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Xiao Cui
212 538 2511
12 January 2014
Economics Research
http://www.credit-suisse.com/researchandanalytics
12 January 2014
US Economics Digest 2
The 2014 FOMC -- New Faces, Same Taper
The composition of the Federal Open Market Committee is undergoing substantial
renovations this year. However, even as its membership is being overhauled, the
Committee’s policy approach likely will look very familiar.
We expect the FOMC to continue along the $10bn/meeting tapering path laid out by
Chairman Bernanke in mid-December. And forward guidance probably will keep gaining
prominence as quantitative easing is wound down.
With the Senate confirmation on January 6 of Janet Yellen as Fed Chair and with
President Obama’s three Fed Governor nominations this past Friday, the complexion of
the 2014 FOMC is finally taking form:
1) Former IMF First Deputy Managing Director and Bank of Israel Governor Stanley
Fischer has been nominated to succeed Janet Yellen as Vice Chair of the Federal
Reserve Board.
2) Lael Brainard, most recently at the US Treasury, has been tapped for the seat
vacated by Governor Elizabeth Duke when she retired from the Fed in August.
3) And Fed Governor Jerome Powell has been offered a full, 14-year term after he
finishes serving out the unexpired term of his predecessor (on January 31).
Assuming all three nominees are confirmed, there would still be one vacancy on the
seven-member Fed Board of Governors. Sarah Bloom Raskin’s move to the US Treasury
seems imminent, which will leave another seat to fill.
These changes all come against the backdrop of the annual rotation of district bank
presidents into voting seats on the FOMC. The 2014 bank president voting contingent is
likely to be more hawkish than it was in 2013.
Also, Title XII of the Dodd-Frank financial reform legislation requires that a second Fed
Vice Chair be named to focus on issues of bank supervision. One natural candidate for the
new position is Fed Governor Tarullo, who has carved out bank supervision as his
specialty on the Board. We expect the new vice chairman to be named sometime this year.
Exhibit 2: The Federal Open Market Committee in 2014
Credit Suisse forecasts (after the January 28-29 FOMC meeeting)
Board of Governors* District Bank Presidents
Janet Yellen, Fed Chair Boston (Eric Rosengren)
Stanley Fischer, Fed Vice Chairman New York (William Dudley), FOMC Vice Chair*
Daniel Tarullo, Fed Vice Chairman for Supervision Philadelphia (Charles Plosser)*
Jerome Powell Cleveland (Sandra Pianalto's successor)*
Jeremy Stein Richmond (Jeffrey Lacker)
Lael Brainard Atlanta (Dennis Lockhart)
Vacant Chicago (Charles Evans)
St. Louis (James Bullard)
Minneapolis (Narayana Kocherlakota)*
Kansas City (Esther George)
Dallas (Richard Fisher)*
San Francisco (John Williams)
Source: Credit Suisse, Federal Reserve * = Voting member in 2014
12 January 2014
US Economics Digest 3
In this research note, we discuss the views of the two new FOMC nominees, expanding on
our October 11, 2013 “US Economics Digest: The FOMC in 2014 – A New Cast of
Characters.” We also provide our hawk/dove scale from January 10, presenting our
rankings of the policy predispositions of officials expected to join the FOMC soon.
Weak Payrolls Won’t Derail the Taper Train
The December payrolls shocker of just 74,000 jobs ranks as one of the biggest downside
surprises in recent memory. A cumulative 38,000 in upward revisions to previous months
did not come close to offsetting the December shortfall relative to expectations, though
they helped to keep three-month average job growth at a respectable 172,000 (Exhibit 2).
We are skeptical that weather is the main reason behind the shortfall. We think it is also
premature to downgrade the economic outlook on one month’s worth of poor job growth
figures. The simplest explanation seems the most persuasive -- a case of quirky data.1
Exhibit 3: Payroll Trend Still Respectable Even With a Disappointing December
Monthly changes in nonfarm payrolls, thousands, excluding Census workers
-1000
-800
-600
-400
-200
0
200
400
'07 '08 '09 '10 '11 '12 '13
MoM, thous.
12MAV: 182K
3MAV: 172K
Dec'13: 74K
Source: Bureau of Labor Statistics, Credit Suisse
The weaker-than-anticipated December employment report should not deter the Fed
in January from continuing along the taper track it laid out on December 18.
Looking further ahead, we do not forecast a significant deviation from the current
tapering strategy when the leadership of the FOMC changes hands in February.
We still expect the FOMC to scale back the pace of its monthly asset purchases by
another $10bn ($5bn MBS, $5bn Treasuries) when it meets on January 28-29. Indeed,
given the concerns expressed in the minutes of the December 17-18 FOMC meeting
about the rising costs of balance sheet expansion, we believe the hurdle for reducing the
$10bn/meeting pace of QE tapering is fairly high.
Below we present the baseline tapering scenario we think the FOMC has in mind for its
QE3 asset purchase program. This scenario assumes that each new taper announcement
goes into effect the first day of the month following each FOMC meeting (Exhibit 4).
If this particular scenario holds, QE3 will have totaled just over $1.6 trillion, more than
double QE2’s $600bn and only about $100bn short of QE1, which expanded the Fed’s
balance sheet by $1.725tn. Under these assumptions, the Fed’s balance sheet will be
about 60% larger at the end of 2014 than it was when QE3 commenced in September
2012 (Exhibit 5).
1 For more on the December US employment report, see our January 10 "US Economics Digest: The lowdown on low payrolls."
12 January 2014
US Economics Digest 4
Exhibit 4: A Smooth QE3 Tapering Scenario Credit Suisse forecasts, $bn
Quarter MBS purchases Treasury purchases Total
Q3 2012 23 0 23
Q4 2012 40/mo 0 120
Q1 2013 40/mo 45/mo 255
Q2 2013 40/mo 45/mo 255
Q3 2013 40/mo 45/mo 255
Q4 2013 40/mo 45/mo 255
Q1 2014 35/mo beginning in Jan;
30/mo beginning in Feb
40/mo beginning in Jan;
35/mo beginning in Feb
205
Q2 2014 25/mo beginning in Apr;
20/mo beginning in May
30/mo beginning in Apr;
25/mo beginning in May
145
Q3 2014 15/mo beginning in Jul;
10/mo beginning in Aug
20/mo beginning in Jul;
15/mo beginning in Aug
85
Q4 2014 5/mo beginning in Oct;
Announcement that program
will end on Oct 31
10/mo beginning in Oct;
Announcement that program
will end on Oct 31
15
TOTAL 823 790 1613
Source: Federal Reserve, Credit Suisse
One observation worth noting in Exhibit 5 is the nearly $600bn difference in the size of the
Fed’s balance sheet at year-end 2014 between a no-taper scenario, and the “smooth
taper” scenario outlined above. Second, and perhaps more important, even under the
smooth taper scenario, the FOMC still would be purchasing a significant $450bn in assets
during 2014.
Exhibit 5: Smooth Taper Still Expected to Expand Balance Sheet by About 60%
Fed total assets, Wednesday levels, $ billions
2500
3100
3700
4300
4900
5500
'12 '13 '14
Dec 31, 2014:$4.5 trillion
(smooth taper)
Jan 8, 2014:
$4.0 trillion
Sep 12, 2012:
$2.8 trillion
Dec 31, 2014:$5.1 trillion (no taper)
Source: Haver Analytics®, Federal Reserve, Credit Suisse
12 January 2014
US Economics Digest 5
Meet the Two New FOMC Nominees
Last Monday evening, the US Senate made it official. Janet Yellen was confirmed to
succeed Ben Bernanke. His second four-year term as Fed Chairman expires at the end of
this month.
The transition from the Bernanke Fed to the Yellen Fed likely will be a very smooth one.
Having served as a Fed governor from 1994-97, as the San Francisco Fed President
from 2004-10 and then as Fed Vice Chair from October 4, 2010 to the present, she is a
highly-respected FOMC veteran who has never dissented at a policy meeting. In the
current environment, her policy bias is at least as dovish as that of Bernanke if not
slightly more so. While we suspect she may tolerate modestly above-target inflation to
promote greater employment gains, Yellen has not wavered in her public support for the
Fed’s 2% inflation target.
This confirmation does not mean that Yellen automatically will chair the FOMC meeting on
January 28-29. She still needs to be sworn into office, a ceremony we expect to take place
within a few days of January 29.
Stanley Fischer – proactive, innovative, and not particularly transparent
A Yellen chairmanship leaves open her Vice Chair seat on the seven-member Board of
Governors. Former MIT professor, IMF First Deputy Managing Director and Bank of Israel
Governor Stanley Fischer has been officially nominated by President Obama to assume
the role of Vice Chair. We can elicit a few observations about Fischer from his eight years
heading the Bank of Israel:
Served during an eventful and challenging period for monetary policy. Fischer’s
eight-year term as the Bank of Israel’s (BoI) governor from May 2005 through June 2013
was a very eventful period. The three main challenges the BoI faced during Fischer’s term
(and to some extent still does) were a sharp decline in external demand in the heart of the
2008-2009 global financial crisis; emerging balance of payments appreciation pressures
on the currency (which is a key risk to real GDP growth in a small, open, and highly
export-driven economy such as Israel); and rising financial stability risks on the back of
sharp increases in housing prices amid a prolonged period of maintaining low policy rate.
Set creditable, proactive, and innovative monetary policy. During his term, Fischer
built a remarkable reputation among locals and internationals due to his proactive,
innovative, and largely successful policy responses to these three challenges.
In addition to the BoI’s aggressive policy rate response to the 2008-2009 global financial
crisis (the policy rate was cut by a cumulative 375bps between October 2008 and March
2009 to a record low of 0.50%), the BoI also introduced a government bond purchase
program in March 2009 (which ended in August 2009) in order to ease monetary
conditions further.
On the currency front, in March 2008, Fischer embarked on a large-scale FX purchase
program in order to curb the appreciation pressure on the currency. (During Fischer’s term,
the central bank purchased a remarkable amount of $47.8bn dollars, which was equivalent
to about 18.5% of Israel’s 2012 GDP.) In response to surging home prices, Fischer
introduced various macroprudential measures and mortgage limitations to curb investors’
housing demand.
Targeting inflation, growth and financial stability. We understand that Fischer
managed the BoI’s monetary policy with so-called “flexible inflation targets.” This approach
advocates targeting inflation, growth/employment and financial stability simultaneously.
Besides his monetary policy record, Fischer also pushed for adding growth and financial
stability goals to the BoI’s price stability mandate (as part of the new Bol’s law that was
legislated by the Israeli parliament in 2010). He also publicly described this approach as
being the “right way to conduct monetary policy” (during one of his last speeches as the
BoI Governor in June 2013).
12 January 2014
US Economics Digest 6
Supportive of Fed actions but more reluctant to comment on future monetary policy.
In recent years, Fischer has supported the Fed’s monetary policy publicly and has tended
to praise the Fed’s balance sheet expansion. We believe he agrees that the Fed needs to
remain exceptionally accommodative, even as it continues to wind down QE3.
However, some modest tension may develop between Fischer and Yellen on the subject
of forward guidance (although it may never become obvious to the public). Fischer’s own
policy communications during his term at the BoI were decidedly less transparent than that
of the FOMC and of many other central banks. In our view, Fischer’s communication –
both via the central bank’s minutes and in public appearances – deliberately contained
only limited information about the future direction of BoI policy.
Lael Brainard – her nomination suggests she has a dovish bent
Another FOMC seat was left vacant when Governor Elizabeth Duke retired from the Fed at
the end of August. President Obama has nominated Lael Brainard for the post. While we
do not know much about Brainard’s policy predilections, it is doubtful that she would have
been secured the nomination had her views been particularly hawkish.
Lael Brainard last served at the US Treasury from 2009 to 2013 as Undersecretary for
International Affairs. In that role, she advised the Secretary of the Treasury on
international economic issues and led the development of US economic policies in a
number of areas, including international finance, debt, and post-crisis economic
stabilization. During her time at the Treasury, Brainard also represented the US at the IMF,
World Bank, and development banks.
Previously, Brainard was a Brookings Institution senior fellow from 2001 to 2009, serving
as the Director of the Global Economy and Development program from 2006 to 2009. Prior
to that, she worked as deputy national economic adviser and deputy assistant to President
Clinton on international economics, where she dealt with issues such as the Asian
financial crisis and China's access to the World Trade Organization. As a PhD graduate
from Harvard, Brainard also gained experience in academia by working as an associate
professor at MIT. Her background also includes working for McKinsey and, separately, on
a microfinance initiative in West Africa.
Often regarded as the country’s top financial diplomat, Brainard attended numerous
meetings with foreign finance ministers and central bankers during her term as
Undersecretary of the Treasury. She played major roles in pressing Europe to take a
bigger step to tackle its sovereign debt crisis and in pushing the Chinese government to
allow the appreciation of the RMB and rebalance its economic growth from investment to
domestic demand.2
Regarding Fed policy, Brainard emphasized in a conversation with the Council on Foreign
Relations that it is extraordinarily important that monetary policy “be oriented very clearly
to domestic objectives, to domestic demand, and that they are oriented in that way under
clear rules, using domestic instruments, not targeting exchange rates.” She is firmly
against the “pursuit of macroeconomic accommodation by the purchase of foreign assets,
or targeting exchange rates.”
Her experiences could prove valuable at the Fed, given the implications of its policies
across markets globally. During her time at the Treasury, Brainard was a regular attendee
at the Kansas City Fed’s annual Jackson Hole Economic Symposium. Brainard is also well
acquainted with Janet Yellen, according to the New York Times (Nov. 6, 2013), which
reported that the two have worked together in the past as the Treasury and the Fed
tackled the challenges of the Great Recession.
2 The New York Times, "Lael Brainard to Step Down from Treasury Post," November 6, 2013.
12 January 2014
US Economics Digest 7
The Annual District Bank Shuffle
The first FOMC meeting of each calendar year (e.g., January 28-29, 2014) features the
annual rotation of district bank presidents into voting seats on the committee. On balance,
we expect the bank president voting contingent on the 2014 FOMC to be its most
hawkish since 2011. This would be due primarily to the rotation of two vocal hawks into
voting seats. At least one formal dissent per meeting is likely in 2014.
The table below shows the rotation of voting presidents for 2012 through 2015:
Exhibit 6: The Annual FOMC Voting Seat Shuffle
Federal Open Market Committee District Bank rotation
Rotation 2012 2013 2014 2015
New York Dudley (NY) Dudley (NY) Dudley (NY) Dudley (NY)
Boston – Philadelphia – Richmond Lacker (Richmond) Rosengren (Boston) Plosser (Philly) Lacker (Richmond)
Chicago – Cleveland Pianalto (Cleveland) Evans (Chicago) Pianalto (Cleveland) Evans (Chicago)
Kansas City – Minneapolis – San Francisco Williams (San Francisco) George (Kansas City) Kocherlakota (Minneapolis) Williams (San Francisco)
St. Louis – Dallas – Atlanta Lockhart (Atlanta) Bullard (St. Louis) Fisher (Dallas) Lockhart (Atlanta)
Source: Federal Reserve, Credit Suisse
In general, the rotation of voting members has an impact on the implementation of
monetary policy only if the incoming presidents carry decidedly different views toward
policy from the outgoing presidents. After all, even though he (or she) has only one vote,
the chairman’s influence often guides the collective thinking of the rest of the committee.
Most FOMC members – particularly the other six governors and NY Fed president – tend
to side with the chairman.
Two frequent dissenters with stringent anti-inflation views will have votes in 2014 –
Charles Plosser (Philadelphia) and Richard Fisher (Dallas). Their positions as voters will
more than offset Esther George’s (Kansas City Fed) loss of a vote next year. This year
was George’s first term as an FOMC voter, and she has dissented in favor of tighter policy
in every policy meeting to date – six so far.
Also moving into voting positions next year will be Narayana Kocherlakota (Minneapolis)
and Sandra Pianalto (Cleveland). Once counted among the hawks, Kocherlakota is now
one of the most dovish of the district bank presidents.
Pianalto, more neutral in her policy leanings, never dissented in her five previous voting
terms. Note that Pianalto has announced her intention to retire this year. We're told that
she intends to stay at the Cleveland Fed until her successor is in place. If she were to
leave before then, the Cleveland Fed's First VP would serve in her place (and vote at
FOMC meetings) in the interim.
Generally, we are uncomfortable applying blanket labels to policymakers. To call someone
a “hawk” (focused more on the Fed’s price stability mandate) or a “dove” (more concerned
with maximum, sustainable employment) is to suggest his or her views are inflexible in the
face of evolving economic and financial market conditions. For the most part, this is clearly
not the case. But, as former Kansas City Fed President Hoenig himself once observed,
these labels are often used as “a quick way to characterize Reserve Bank presidents'
opinions about future monetary policy.”
With the above caveat in mind, we provide our hawk/dove scale from January 10. Exhibit 7
lists the individuals we expect to see on the FOMC after the January Committee meeting,
along with our informal determination of their policy leanings based on each official’s
voting history and/or public comments:
12 January 2014
US Economics Digest 8
Exhibit 7: Policy bias scale
Hawkish Neutral Dovish 2013 Voter 2014 Voter End of term
Charles I. Plosser
(Philadelphia Fed President) Feb 29, 2016
Esther George
(Kansas City Fed President) Feb 29, 2016
Richard W. Fisher
(Dallas Fed President) Feb 29, 2016
Jeffery M. Lacker
(Richmond Fed President) Feb 29, 2016
Sandra Pianalto*
(Cleveland Fed President) Feb 29, 2016
Dennis P. Lockhart
(Atlanta Fed President) Feb 29, 2016
Jerome H. Powell – NOMINATED
(Governor) Jan 31, 2028
Jeremy Stein
(Governor) Jan 31, 2018
Daniel K. Tarullo
(Governor) Jan 31, 2022
Lael Brainard – NOMINATED
(Governor) Jan 31, 2026
James Bullard
(St. Louis Fed President) Feb 29, 2016
William Dudley
(New York Fed President) Feb 29, 2016
John Williams
(San Francisco Fed President) Feb 29, 2016
Stanley Fischer – NOMINATED
(Vice Chair, FRB)
Jan 31, 2024
(Governor)
Oct 4, 2018?
(Vice Chair)
Janet L. Yellen
(Chairman)
Jan 31, 2020
(Governor)
Jan 31, 2018
(Chairman)
Narayana Kocherlakota
(Minneapolis Fed President) Feb 29, 2016
Eric S. Rosengren
(Boston Fed President) Feb 29, 2016
Charles L. Evans
(Chicago Fed President) Feb 29, 2016
Vacant **
(Governor) Jan 31, 2016
* Pianalto is retiring in early 2014.
** Raskin is leaving the Fed to join the US Treasury.
Source: Credit Suisse, Federal Reserve
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Regional, India, Indonesia, Australia
Christiaan Tuntono
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Regional, Malaysia, Thailand
Michael Wan
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Singapore, Philippines
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China
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