This week’s meeting of the Federal Open Markets Committee should be more exciting than most. Though few outside economists expect the U.S. Federal Reserve to raise interest rates this week, Fed Chair Janet Yellen has a lot of cajoling to do.
After the last FOMC meeting in September, Yellen said a liftoff from historic low rates probably would come before the end of the year — even in the midst of broader fears of a global downturn related to China’s economic slowdown. But statements from Fed officials in recent weeks indicate the central bank is split on the appropriate timing of the next increase.
Beginning with this week’s meeting — and over the next few months — Yellen must persuade her opposition to march in unison behind her planned hike.
"It’s not surprising at a time like this there’d be differences of opinion, but it’s getting to the point where clarity about what they’re going to do is more important than the particular timing of the first rate move," said Jon Faust, professor of economics at Johns Hopkins University.
How will Yellen get her way? She may have to change how she presides over the FOMC meeting. Former Fed officials say chairmen can influence the outcome of a meeting by the way they run it. Ben Bernanke, who served as chair from 2006 to 2013, would almost always summarize each meeting as a constructive way to pull attendees together at the gathering’s close. But when he thought he needed to take an active role in framing the discussion, he would clarify his stance on issues at the start of a meeting.
“Ben usually spoke last, mainly in a summary role, not often taking a strong stance about his own position. He played a consensus role, and Janet Yellen has largely been the same way,” says Faust, who was assistant director in the Federal Reserve Board’s division of international finance from 1991 to 2006.
To understand the influence a chairman can have on the meeting’s outcome, it’s important to grasp the format of the meeting and how the central bank’s chair leads participants to major decisions. Members of the Federal Reserve’s Board of Governors and presidents of the 12 regional reserve banks meet eight times a year in Washington to discuss how best to set monetary policy to advance the central bank’s dual mandate: full employment and stable prices. These two-day confabs follow a traditional format:
As officials enter the room in the Federal Reserve’s headquarters, they sit at a large oval table, big enough to seat about 25 people, former Fed Gov. Elizabeth Duke explained in her speech “Come with me to the FOMC” at the Money Marketeers of New York University in 2010. The Fed chair sits at the center of the table, and members of the Board of Governors sit to the chair’s left, beginning with the vice chair and then continuing in order of seniority, Duke explained. On the chair's right are the deputy secretary of the committee and the president of the Federal Reserve Bank of New York.
The other Federal Reserve Bank presidents are positioned around the ends of the table, and the staffers and economists who present research and data sit on the side opposite the chairman.
The voting members of the committee include all the members of the Board of Governors, seven in all when there is a full board, the New York Fed president, and four of the other presidents on a rotating basis. However, this year there are only five out of the seven governors, making a total of 10 voting FOMC members.
Once the chairman calls the meeting to order, the manager of the System Open Market Account describes developments in the financial markets since the last meeting. The SOMA, which is managed by the New York Fed, is the Federal Reserve's portfolio of securities used to implement monetary policy.
After any special topics or briefings, the discussion then turns to the economy. The director of the Fed’s division of research and statistics and the director of the division of international finance give a joint presentation on the status and outlook for the domestic and global economies.
Following a question-and-answer period, each FOMC participant gives his or her input on the economy, in what is referred to as the "economic go-round." Generally, the Reserve Bank presidents speak first, touching on the conditions in their districts, followed by the members of the Board of Governors. Everyone shares his or her views on current and expected national and international economic conditions.
The chairman concludes the “economic go-round” with a summary of what all the other policymakers said about the economy, then makes his or her own comments.
Typically on the second day of the meeting, the director of the board's division of monetary affairs kicks off the policy discussion with a presentation of monetary policy alternatives. For each alternative, the director talks committee members through the rationale for choosing a particular direction and the expected financial market response.
The meeting then launches into a “monetary policy go-round” phase of discussions. The chair can begin or end the monetary policy go-round with his or her views and policy prescriptions. Participants typically then follow after the chair and respond to his or her proposal. After more discussion, the committee votes, confirms the date of its next scheduled meeting, and adjourns.
Former Fed officials say Bernanke aimed to enfranchise Fed meeting participants, whereas his predecessors Alan Greenspan (1987-2006) and Paul Volcker (1979-1987), were more likely to voice their opinions at the beginning of the first day’s proceedings.
Greenspan rarely spoke during the economic go-round, but he would often begin the meeting’s monetary policy go-round with his view of policy decisions that needed addressing, former Fed officials say. Participants would then respond to his proposals. However, Bernanke spoke at the end of the economic go-round. Then in the policy go-round, he would generally wait until everyone else had stated their view before he shared his own opinion and suggested a path for moving forward.
How Janet Yellen orchestrates this week’s meeting will be critically important.
"It’s quite common to have a prominent public split in the committee. However, it’s not nearly as common to have that public split be among the governors," says Faust.