WASHINGTON – Janet Yellen’s Federal Reserve has demonstrated one of the core tenets of central banking: On the Fed panel that sets interest rates, some votes are more equal than others.
The panel – the Federal Open Market Committee – voted Wednesday to keep rates unchanged, something it’s done for six straight meetings. What was unusual this time was that the result drew dissenting votes from three members – the most dissents in nearly two years.
The 7-3 vote reflected “no” votes from the presidents of three regional Fed banks – Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston. All wanted to raise rates immediately. And all were powerless to do so.
Not since December 2014 had so many policymakers dissented from a Fed vote. But critically, the “no” votes Wednesday included none of the Fed’s influential board members in Washington.
The open market committee’s voting members are made up of seven board members in Washington; the head of the New York regional Fed; and four of the 11 other regional bank presidents who serve on a rotating basis.
The last time any board member has dissented from a Fed policy vote was in 2005.
That’s where the unequal nature of Fed votes comes in. The Fed isn’t like the Supreme Court, where 5-4 rulings are common. Fed leaders generally prefer votes that are unanimous or nearly so – to foster confidence among investors that it’s pursuing rate policies that command broad support.
But if Fed leaders can’t get all voting members of the open market committee to back them, they can still preserve market confidence if they enjoy the support of all members of the board. Like the Fed chair, the board members are picked by the president and confirmed by the Senate to a job in which they’re supposed to represent the entire country.
By contrast, the regional bank presidents are chosen by the boards of each regional bank. They tend to represent the views of business leaders in their districts, and they are often perceived as being sympathetic to banking interests and quicker to support increases in interest rates.
Once during the mid-1980s, when Paul Volcker, then the Fed chair, was outvoted by the seven-member board, he went to Treasury Secretary James Baker and offered to resign. Baker resolved the conflict by persuading Fed board members to change their votes and back Volcker.