January 24, 2012
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.