Tuesday, March 18, 2008

Should he have held out for unanimity? 

I had to go back through a few papers to see when more dissent was had in a meeting than this one. It's not all that unusual, it turns out. Belden (JMCB 1989 -- JSTOR link) notes that there were six episodes where three bank presidents dissented on an FOMC vote, and five of the six times all three dissented in favor of a tighter monetary policy (smaller or no decrease in the Fed funds rate target.) Alan Greenspan was much more patient in seeking unanimity in Fed decisions, argues Chappell, McGregor and Vermilyea (2007). WSJ's Economics Blog notes that this is the first time we've had five dissented FOMC moves in a row

In today's case, two presidents "preferred less aggressive action at this meeting". Bank presidents (as opposed to governors) tend to be more concerned with inflation. Given that the market had some expectation of a 100 bp cut, I am quite sure 75 bp was a compromise that was as close as Bernanke could get to a broad majority view. Turbulent times will spread out policy preferences.

I wonder if this is a good thing. Sudeep Reddy says that Bernanke views the dissents as a sign of a more democratic Fed. That would mean that it was more democratic pre-Greenspan as well, since that's the only period I can see where it drops (and I think I have a pretty good handle going back to Arthur Burns.) On the same blog, David Wessel notes a recent paper that argues central banks might talk too much.
The recognition that monetary policy is conducted in an environment of imperfect information is central to understanding both the potential benefits and limitations of central bank communications. It rationalizes the role central bank communications may play in helping to inform private sector decisions and expectations. But it also serves to emphasize that much of the information communicated by central banks is noisy and imperfect.
I noted last summer that Bernanke has been trying to wean financial markets from trying to read too much into Fed statements. I don't think he is trying to confuse markets deliberately, but he's clearly less worried about signaling dispersed policy preferences within the Fed than Greenspan was. Add to this dispersion the several new instruments extended for getting credit into financial markets (the kitchen sink was thrown, one says) and the desire to keep at least a couple bullets in the holster, and that we still need to convince some people that the issue is liquidity, not solvency, I'm calling 75 bp about right. I'd've argued for 50, but you wouldn't have needed to be Alan Greenspan to get me to accept 75.

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