The "hawkish combination" of Federal Reserve Bank of Philadelphia 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 L.L.C., of Philadelphia.
The two outspoken critics of departing Fed chief Ben Bernanke's strategy of "quantitative easing" - buying up mortgage bonds and other non-U.S. Treasury debt to try to keep interest rates down and stimulate the economy - have already shifted the "real discussion," from a choice of "tapering" the bond buys or not, to a choice of whether to slice the Fed's monthly bond buys by $20 billion a month instead of $10 billion, LeBas adds.
The "serious fundamental economic disagreement" between the skeptical Plosser-Fisher axis and Yellen's more activist views "could prove Yellen's biggest practical challenge," he writes.
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 Yellen and the New York Fed," as it has been for decades, with little reference to ideological 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.
Whether Plosser and other dissidents affect policy will depend on how Yellen manages debate, Eisenbeis told me:
"[Former] Chairman [Alan] Greenspan always led off the policy discussion, so those with differing views would seem to be at odds with the chairman."
By contrast, "Under Chairman Bernanke, the order of speaking during the policy round changed: He spoke last. . . . This gave everyone the freedom to express their views unconstrained. To my mind that was the far superior process."
How will Chairman
critics? "Yet to be determined," Eisenbeis concluded.