Former Minneapolis Federal Reserve Bank President Narayana Kocherlakota found it impressive when the Bank of Japan recently embarked on a bold new policy to boost the Japanese economy, a plan to drive interest rates lower than zero.
It wasn’t really the decision itself that impressed him, but that it came on a 5-4 vote.
That kind of close vote would never happen here. Our Federal Reserve policy committee only shifts direction when nearly everyone agrees — and as a result probably plays it too safe.
Kocherlakota’s discussion of the downside of consensus leadership was one of many commentaries he has put online since leaving the Minneapolis Fed job at the end of December. Reached at the University of Rochester in New York, where he has taken an academic appointment, he pleasantly explained that he’d let the blog post speak for itself.
He is certainly not the first person who has observed that when it comes time to vote on what to do, the outcome on the Fed’s monetary policy committee is never a nail-biter.
The Federal Reserve is an oddball organization among central banks, with the members of the Fed’s board of governors in Washington making decisions about the economy along with the New York Fed president and a rotating group of additional voting members drawn from the presidents of regional Federal Reserve Banks all over the country, including Minneapolis.
As Kocherlakota observed, there hasn’t been a single committee decision in at least 25 years that had more than three no votes. There hasn’t been a single no vote by any of the Fed governors in 10 years, and few dissents from other members of the committee.
In the history of the Fed, there have been a lot more disagreements about what to do in periods of economic turbulence, said David Wheelock, deputy director of research of the Federal Reserve Bank of St. Louis and a co-author of a 2014 paper on the voting record of the Fed’s monetary policy committee.
Dissent was common in the late 1970s and early 1980s, he said, as the Fed tried to tame inflation. He doesn’t have an explanation for why the more recent period of financial crisis and recession, with unemployment hitting double digits, didn’t generate more disagreement.
During his tenure as president of the Minneapolis Federal Reserve Bank, Kocherlakota changed his mind to become an advocate for more stimulus, including the boldest policy in the Fed’s history: injecting money into the financial system through massive purchases of bonds to drive down unemployment and keep the inflation rate from falling.
It might be tempting to see his recent comments as a shot at former colleagues who agreed with him on policy but didn’t vote with him. It seems far more likely, though, that he just thinks the culture of decision-by-consensus is getting in the way of doing the right thing.
“Kocherlakota is on to something important here,” said Tim Duy, a University of Oregon professor and prominent Federal Reserve observer, in an e-mail. “Ultimately, it is less important that they have consensus than that they make the right policy decisions. And if achieving consensus reduces their capacity for making good policy, then it is a problem.”
Part of Kocherlakota’s argument would sound familiar to anyone who’s ever banged their head against a cinder block wall in frustration after trying to get a group to make a decision. If everyone has to agree, the most likely decision is really no decision. It’s just more of what’s already being done.
The policy shift at the Federal Reserve in December, the decision finally to raise short-term interest rates, was approved by (of course) a unanimous vote. Kocherlakota has written that it was a mistake, particularly in light of recent signs of a shaky economy, including falling prices for commodities.
But given his observations about how this committee works, no one should expect all of the members to quickly recognize that they blew it and then reverse their decision.
Kocherlakota also pointed out that making sure everyone goes along can shift a lot of power to a small minority of members, who could effectively veto a good idea just by hinting they might vote no.
And finally, he noted that the unspoken requirement that everyone has to buy into the decision leads to a public announcement from the Fed that ends up with way too many on-the-other-hand kind of conditions in it. Instead of clarity, it comes out as a muddle.
There is a good defense against the charges Kocherlakota is making, of course. It’s the idea of showing a united front once a decision is reached.
We don’t get to see the policy arguments among members of this powerful committee for five years, as the Fed has only just released the audio transcripts from 2010 meetings. They are a tough slog for anyone other than monetary policy nerds, at over 1,600 pages.
Maybe the most interesting give-and-take came in late 2010, after a spate of disappointing news items about the economy had gotten the Fed to once again consider buying many billions of dollars of treasury and agency securities to inject money into the financial system.
Fed governor Kevin Warsh, who has since resigned, really didn’t like this policy idea. It looked to him like a long-shot bet to jack up the price of assets like stocks with the hope that people would then feel better about spending and investing, including hiring more employees.
Meanwhile, the risks looked far bigger, including his fears about what would happen in bond markets with the Federal Reserve going on another bond-buying binge.
But he didn’t vote no. He admired the leadership of then-Chairman Ben Bernanke through some challenging years, he explained, and didn’t want to be the guy who undermined this plan’s chances of success by publicly showing no confidence in it.
Kocherlakota didn’t address the value of a united front in his blog post, but it’s fair to conclude what he thinks about it.
His last vote as a member of the Fed’s policy committee came in December 2014. The proposal on the table was to stay the course, with no more extraordinary bond buying but also doing nothing to raise short-term interest rates.
He voted no.
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