New Fed voters likelier to back help for economy

MARTIN CRUTSINGER

AP Busi­ness Writer

NEW YORK — If Chair­man Ben Bernanke decides the econ­omy needs more help from the Fed­eral Reserve this year, he prob­a­bly won’t face as much resis­tance as he did last year.

Call it the chang­ing of the guard.

As the Fed’s pol­icy com­mit­tee meets for the first time this year, its ros­ter of vot­ing mem­bers is rotat­ing slightly, as it does each year. And its new makeup sug­gests fewer mem­bers would oppose fur­ther steps to boost the economy.

Twice last year, Fed action to try to fur­ther lower long-term inter­est rates drew three dis­sent­ing votes out of 10. It was the most dis­sents in nearly 20 years. The “no” votes came from three regional Fed bank pres­i­dents who wor­ried that addi­tional moves to try to reduce long-term rates could fan inflation.

A fourth regional bank pres­i­dent twice dis­sented last year for the oppo­site rea­son: He wanted to go fur­ther to help the economy.

All four dis­senters have lost their votes on the Fed’s pol­i­cy­mak­ing committee.

Replac­ing them are: Jef­frey Lacker, pres­i­dent of the Rich­mond regional Fed bank; John Williams of the San Fran­cisco Fed; San­dra Pianalto of the Cleve­land Fed; and Den­nis Lock­hart of the Atlanta Fed.

Should Bernanke push a new bond-buying pro­gram, only Lacker is seen as a prob­a­ble dissent.

Lacker is viewed as the most “hawk­ish” of the new vot­ing mem­bers, Williams the most “dovish.” Hawks tend to be most con­cerned that super-low inter­est rates could ignite infla­tion. Doves put a higher pri­or­ity on boost­ing the econ­omy and reduc­ing unemployment.

Pianalto and Lock­hart are seen as cen­trists unlikely to break from the major­ity view.

In the past, the Fed has bought bonds to try to drive down long-term inter­est rates, encour­age bor­row­ing and spend­ing and lift stock prices. The goal is to increase eco­nomic growth and hiring.

In Decem­ber, Lacker told reporters he was “hard-pressed to see the ratio­nale” for any fur­ther Fed efforts to increase growth.

Yet over­all within the Fed this year, “I think there will be a lit­tle less mil­i­tancy and a lit­tle more will­ing­ness to move for­ward with the chair­man,” pre­dicts Diane Swonk, chief econ­o­mist at Mesirow Financial.

That said, few econ­o­mists expect the Fed to pur­sue more bond pur­chases soon, unless a Euro­pean reces­sion were to shrink U.S. eco­nomic growth and threaten the gains the econ­omy has made in recent months.

“Bernanke will have the votes to pur­sue an eas­ier credit pol­icy if he needs to do so, but I just don’t think the Fed will go fur­ther unless Europe goes bad,” said David Wyss, for­mer chief econ­o­mist at Stan­dard & Poor’s. “Things in the U.S. econ­omy are begin­ning to look bet­ter — not great, but better.”

Bernanke already starts the year with a base of sup­port within the Fed. The pol­icy com­mit­tee nor­mally com­prises 12 vot­ing members:

— Seven Fed gov­er­nors in Washington.

— The pres­i­dent of the New York Fed.

— Four of the 11 other regional bank pres­i­dents, who serve one-year rotat­ing terms. This group is where dis­sents typ­i­cally come from.

The seven gov­er­nors, includ­ing the chair­man, always have a vote. So does the New York Fed’s pres­i­dent. All these mem­bers tra­di­tion­ally back the chairman.

On the Fed’s board, two of the seven seats are vacant, even though Pres­i­dent Barack Obama has nom­i­nated replace­ments for them: Jeremy Stein, a Har­vard eco­nom­ics pro­fes­sor who is a Demo­c­rat, and Jerome Pow­ell, a Trea­sury offi­cial in the George H.W. Bush admin­is­tra­tion who is a Republican.

Twin­ning a Demo­c­rat and a Repub­li­can was an Obama effort to win Sen­ate con­fir­ma­tion for both. But Sen­ate Repub­li­cans have threat­ened to hold up those nom­i­na­tions because of Obama’s use of a recess appoint­ment to install Richard Cor­dray as the first head of the Con­sumer Finan­cial Pro­tec­tion Bureau.

Even if the board seats remain vacant, Bernanke will con­tinue to com­mand unan­i­mous sup­port on the board.

No announce­ments of fur­ther action to try to lift the econ­omy through bond pur­chases are expected when the Fed’s meet­ing ends Wednes­day. Most ana­lysts think Fed mem­bers want to put off such a step to see if the econ­omy can extend the gains it’s made in recent months.

Mark Zandi, chief econ­o­mist at Moody’s Ana­lyt­ics, said he thinks fur­ther bond buy­ing is likely this year only if Europe’s finan­cial cri­sis desta­bi­lized U.S. finan­cial mar­kets and threat­ened the U.S. economy.

“Fur­ther bond buy­ing will depend on two things: that the econ­omy con­tin­ues to strug­gle and that con­cerns about defla­tion rise,” Zandi said.

Defla­tion is a pro­longed drop in wages, prices and the value of assets like stocks and houses. The coun­try last suf­fered seri­ous defla­tion dur­ing the 1930s.

Zandi said he felt more bond buy­ing isn’t prob­a­ble this year because he is fore­cast­ing the econ­omy will per­form better.

“My out­look is for an econ­omy that is still soft but not strug­gling,” Zandi said.

Hir­ing has picked up. Fac­to­ries are busier. Gaso­line prices are well off their highs. The depressed hous­ing indus­try appears a lit­tle health­ier. And stocks have reached their high­est point since summer.

The stronger job growth has raised hopes more jobs will soon accel­er­ate income and spend­ing. The result could be what econ­o­mists call a “vir­tu­ous cycle,” in which busi­nesses respond to grow­ing demand by hir­ing even more.

Should that hap­pen, the Fed might decide that fur­ther steps to ener­gize the econ­omy aren’t necessary.

Posted by AP News on Jan 24 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.