The "hawkish combination" of Philadelphia Federal Reserve Bank President Charles I. Plosser and Dallas Fed President Richard Fisher, free-market-friendly economists who have rotated onto the Federal Reserve Open Market Committee this year, "may prove to have substantial power in setting the agenda" for Janet Yellen's first year as Fed chair, writes Guy LeBas, boss bond strategist at Janney Montgomery Scott LLC, Philadelphia.
The two had challenged aspects of ex-Fed chief Ben Bernanke's strategy of buying up mortgage bonds and other non-US Treasury debt to try and keep interest rates down/ stimulate the economy ("quantitative easing" or QE). Now, on the board, they have shifted the "real discussion," from a choice of whether or not to "taper" Fed bond-buying -- to a choice of whether to slice the Fed's monthly bond buys by "$10 billion or $20 billion," LaBas adds. The "serious fundamental economic disagreement" between the skeptical Plosser-Fisher axis, and Yellen's more activist save-the-economy views, "could prove Yellen's biggest practical challenge."
Or not: "Plosser and Fisher will remain in the vocal minority and be ignored," predicts David Nawrocki, Salisbury professor of finance at Villanova University. "Fed policy will be determined by" the chairman, appointed by the U.S. President, "and the New York Fed," as it has been for decades, with little reference to ideological nuance or regional views, he added. The stronger economy, not the minority faction, has caused the Fed to taper its bond-buying, Nawrocki told me.
Even if the skeptics lack power, debate is healthy: "Talking things out only makes for better decision making," says Robert A. Eisenbeis, economist for Vineland-based Cumberland Asset Management.