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The Fed will have some new faces on its rate-setting committee in 2024. But analysts are divided on whether it will change the balance of power between hawks and dovs, and thus the direction of monetary policy.
The change is happening because of how the central bank allocates its votes on the Federal Open Market Committee, the body that has the final say on whether interest rates rise or fall.
Four of the 12 seats rotate each year as part of a power-sharing agreement with quasi-public local federal banks based around the country. This year, those four slots will be given to the regional Fed presidents of Cleveland, Richmond, Atlanta, and San Francisco: Loretta Mester, Tom Barkin, Raphael Bostic, and Mary Daley.
Leaving the committee are Austan Goolsby, Patrick Harker, Neal Kashkari and Rory Logan, the district Fed presidents of Chicago, Philadelphia, Minneapolis and Dallas who will be eligible to vote in 2023. .
This new FOMC action will come under intense scrutiny this year, as Wall Street expects six rate cuts starting in March.
After raising interest rates to a 22-year high in 2023, the FOMC left them unchanged for the second half of this year. Fed officials expect a median of three rate cuts in 2024.
Much of the FOMC will remain in place beyond 2023, as the FOMC includes eight permanent board seats, including the president of the New York Fed (currently John Williams) and seven presidents of the Washington Fed appointed by the president.
But Gregory Darko, chief economist at Ernst & Young, said the four new members could make the FOMC a little more dovish, using Fed terminology for members willing to cut interest rates to stimulate the economy. He said there is.
He said Bostic and Daley fit that dovish description, but Barkin’s position could be more neutral.
Mr. Bostic recently predicted a rate cut in the second half of 2024, and Mr. Daly has publicly acknowledged that it is appropriate to begin negotiations for a rate cut, something most of his colleagues are reluctant to say publicly. Ta.
Barkin said he wants confidence that inflation has fallen to the Fed’s 2% target before considering cutting rates.
Mr. Mester, one of the four new appointees, believes Mr. Darko is more of a hawk, the Fed’s terminology for officials inclined to raise interest rates as a way to rein in inflation.
Mr. Mester may have demonstrated this when he recently said that the market is “a little bit ahead” of the Fed by assuming a rate cut is coming soon.
But Mr. Mester’s seat could still turn dovish by the second half of this year because of the Fed’s mandatory age and seniority policies.
Federal Reserve rules require local bank presidents appointed after age 55 to serve a 10-year term, which is the case for Mr. Mester, who will retire in mid-2024.
If she retires, a pre-nominated replacement will vote in her place. In 2024, that person is Goolsby of the Chicago Fed, who was dovish in some of his public comments last year. He has repeatedly said the Fed is on a “golden path” to reining in inflation without causing a recession.
But not all analysts agree that the new members tilt the committee in a dovish direction.
Andrew Patterson, senior international economist at Vanguard, said he expects the committee will likely be more hawkish than dovish with the additions of Daly and Mester and the departures of Harker and Goolsby.
He said this was a positive thing because it would help the commission avoid pre-emptive cuts.
“We believe that cutting interest rates too early to avoid a broader macroeconomic downturn could lead to a reacceleration of inflation, requiring rate hikes to resume later, and ultimately leading to a recession,” Patterson said. I’m thinking about it,” he said.
Matthew Ruzzetti, chief U.S. economist at Deutsche Bank Securities, takes a third view. He said that when it comes to the question of hawks or doves, the turnover among Fed voters will ultimately be about the same amount.
But Ruzzetti doubts the committee will be able to maintain the same cohesiveness it had during the rate hike.
“While the FOMC’s decision is geared toward a period of rate cuts over the next year, which is a more contentious decision, it would not be surprising to see greater disagreement between officials and voters,” Ruzzetti said. Ta.
“Topics for discussion”
Fed officials agreed that interest rates were likely to peak at their last policy meeting in 2023, and almost all agreed that they expected rates to peak “by the end of 2024,” according to the minutes of a Dec. 13 meeting released by the central bank. “We expect that interest rate cuts will be appropriate.” Bank on Wednesday.
However, there was no discussion of exactly when these rate cuts would begin, with participants leaving on the table the option of raising interest rates if inflation heats up again.
In a press conference after the previous meeting, Fed Chairman Jerome Powell said central bank officials had begun discussing when to reduce policy restraints, calling it a “topic for discussion” at the December meeting. He called it a “topic for future discussion.” we are looking forward. ”
Markets rallied in response to Chairman Powell’s remarks, welcoming the return to lower interest rates. But in the days that followed, several Fed officials tried to backtrack on whether or how fast rates would actually be cut.
Williams, one of the FOMC’s permanent voters, said it was “premature” to talk about a rate cut in March.
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