Cheap-money Fed ignored rate-hike advice from 8 of 12 U.S. regions

Top Federal Reserve officials are "fractured" by their "growing split" on what to do about U.S. interest-rate targets, with most regional Feds, including Philadelphia under new president Patrick Harker, joining as hawks who seek to boost the cost of money, against cheap-money advocates in Wall Street and Washington, writes Bob Eisenbeis, former Fed research economist now with Vineland- and Sarasota-based Cumberland Advisors.

Sifting through Fed monetary policy releases, Eisenbeis counted the biweekly Fed discount rate advice from the 12 regional Fed banks -- and found a strong shift toward higher rates (which are favored by savers and regional lenders): According to the September list, eight regional Fed boards, a two-thirds majority, favored boosting the discount rate (currently 0.5-0.75%), to 1%, with previously dovish Atlanta, St. Louis and San Francisco joining longtime hawks Philadelphia, Cleveland, Dallas and Kansas City and earlier convert Richmond. The Harker-led Philly Fed is continuing the higher-rates position of his monetarist predecessor, Charles Plosser.

By contrast, the Wall Street-flavored Fed board in New York, backed by Boston and Chicago (with Minneapolis uniquely favoring even cheaper money), still opposed even this 0.25% boost in interest targets. The minority triumphed with Fed chair Janet Yellen and other top Fed decision-makers, after lobbying by the chairmen of Goldman Sachs, JPMorgan and other Wall Street banks to keep rates in the basement, as I noted here. Cheap-money advocates worry even a token interest-rate hike would discourage borrowing, stock-market speculation, foreign trade and their other lucrative pursuits.

While the local Fed's vote is supposed to represent its board of bankers and business executives (Philadelphia's includes, most prominently, Comcast executive Michael Angelakis), "the president and bank's board are usually in sync, and it is unusual to find significant differences on policy," Eisenbeis notes. So the local board's positions "provide an important clue as to where each Federal Reserve Bank president may lie."

The "solid majority of eight bank presidents" favoring higher rates, as Eisenbeis calls them, have so far been outmaneuvered by Yellen, her Board of Governors, and those Fed executives closest to the New York-Washington financial-governmental axis. New York Fed chair William Dudley is the Federal Open Markets Committee's permanent vice chairman; the hawkish provincial presidents, by contrast, just rotate on and off; Harker won't join FOMC until 2017.

Is the division, the refusal to endorse the view from most of the country, a problem? "Different views," in themselves, are "not a sign of a lack of leadership or a problem," Eisenbeis concludes. "At a time like this, when the FOMC is in unchartered waters, one would expect and hope that reasonable people would disagree. The existence of a wide range of views is to be expected.

"Furthermore, it is clear that those differences are being aired and openly discussed. This is a sign of a healthy institution." But no change in policy, let alone majority rule, for now.  (See also my column in the Oct. 26 Philadelphia Inquirer here.)