Regional presidents on FOMC did some rate-increase vote-switching
The Federal Reserve's Open Market Committee voted again Wednesday not to raise interest rates - that part is barely news. But an unusual public split divided its members at this week's meeting.
The
Federal Reserve's Open Market Committee
voted again Wednesday not to raise interest rates - that part is barely news. But an unusual public split divided its members at this week's meeting.
Permanent FOMC members based in Washington and New York voted in lockstep behind Chair Janet Yellen - as usual - to keep interest rates low.
Wall Street applauded, boosting share prices as M&A artists, trade financiers, overextended energy investors, and real-estate speculators looked forward to more cheap money.
But most of the rotating band of regional Fed bank presidents, who hold a minority of the committee seats, broke from Yellen and voted to raise rates, which would benefit long-suffering savers, underfunded pension plans, and the hard-pressed community banks for whom the regional Feds serve as watchdog.
Switching their votes from the committee's July meeting to support a rate increase this time were Loretta Mester, president of the Federal Reserve Bank of Cleveland (and former chief of the Philly Fed's economic-research department), and Eric Rosengren, president of the Boston Fed.
They joined Esther George, Kansas City Fed president, who was the only vote for higher rates at the July meeting.
Eleven of the regional Fed presidents sit on the committee in succession. Among the four currently serving FOMC members, the only one still opposing a rate increase Wednesday was James Bullard of St. Louis.
New York Fed boss William C. Dudley, with his bank's unique permanent FOMC seat, voted once again with Yellen. New York's tendency to identify with its Wall Street constituency is so deeply assumed that the Fed's founders tried to balance it by setting up the regional banks, whose presidents are elected mostly by local business leaders, plus labor and community groups.
Boston's Rosengren "is on record seeing concern for the real-estate bubble," which risks drawing too much speculative capital into unsustainable projects if money stays cheap, noted Thomas Wilson, senior investment manager at $19 billion-asset Brinker Capital in Berwyn.
Cheap money hasn't boosted business investing, noted Jeffrey M. Hudson, a partner in Cedar Ridge Partners, a Greenwich, Conn., hedge fund and mutual-fund manager that both buys and shorts bonds. "Companies are not investing," he told me. They are using cheap interest rates to "issue debt and buy stock. That is not value creation."
Despite Rosengren's and other regional presidents' concerns over the abuse of cheap money, the Fed majority is moving "at a glacial pace" toward the rate increases Yellen promised last year, Brinker's Wilson said.
As Yellen noted in her report, "the consumer looks good, but business spending continues weak," he added. "Because there's a lack of inflation, the Fed can afford to be patient." But business owners tell Wilson they are still in no hurry to invest, given the national uncertainty over regulations, taxes, and the direction of the government in Washington.
The committee "should raise rates" at its next big meeting in December, but it has locked itself into acting only when economic data reach its own targets for an increase, noted Casey Clark, vice president of investment strategy at $32 billion-asset Glenmede Trust Co. in Philadelphia.
The Fed is now paying more attention to other financial "tools" besides interest rates if the economy slows again, said Guy LaBas, chief bond strategist at Janney Capital Markets.
In a note to clients, Michael Dolega, senior economist at TD Bank, wrote: "We view this statement as a set-up for an increase later this year."
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