During the Volker and Greenspan eras the Fed tended to essentially have a single voice, largely due to the influence of the Fed Chair. But starting with Bernanke and more so under Yellen, the Fed has evolved toward an acceptance of divergent views, behaving more like a proper ‘committee’.
Over the last 24-48 hours we have had a taste of such divergence in action, with Fed Governors Brainard and Tarullo:
1) indicating a bias away form 2015 lift-off,
2) questioning the Phillips curve approach, and
3) wanting to see more progress on the inflation front before supporting lift-off.
This is a departure from the rate hike “later this year” script, even if VC Fischer has said that this is an “expectation, not a commitment”. For financial markets accustomed to a consistent message and effectively being spoon-fed the Fed’s intentions, such public display of individual voices smacks of communication fail.
But this is a reality we must accept, reflecting the sea-change within the Fed, the uncertain economic environment, and the difficulty from exiting unconventional easing steps of ZIRP and QE. Given the importance of the policy normalization process it seems normal that the Fed is having a healthy debate.
The alternative is a trigger-happy and accident-prone Fed that is forced to follow the likes of Riksbank and RBNZ in a policy U-turn.
The comments from Brainard and Tarullo confirm that the Fed is split, but also suggest this is more than just about rolling forward the lift-off debate another quarter or two.
