BY NARAYANA K OCHERLAKOTA Bloomberg Opinion
There are two vacancies on the Federal Reserve Board of Governors. President Donald Trump has nominated monetary policy experts Judy Shelton and Christopher Waller to fill them, subject to confirmation by the U.S. Senate. The president picked Shelton and Waller because they are seen as favoring easier monetary policy. As governors, how would the views of Shelton and Waller affect the Fed's choices?
Here are some relevant facts: No governor has dissented from a Federal Open Market Committee decision since 2005. There has been no FOMC meeting in which more than one governor dissented since 1993. Three governors have dissented at the same meeting only twice since 1936.
These observations are often interpreted as meaning that the governors will always follow the chairman's lead in setting monetary policy. Under this reading of the history, Shelton and Waller would have no influence on monetary policy and would go along with the majority.
But there is another possible interpretation. Suppose that the chairman of the FOMC was concerned that a policy decision in which multiple governors dissented would lead markets and the public to have significant doubts about his control over monetary policy. Clearly, the chairman would want to avoid this. As a result, any bloc of two governors -- such as Shelton and Waller -- could have enormous influence over the direction of monetary policy simply by threatening to dissent, leading the chairman to tailor policy decisions to take account of their views.
So, now we have two possible theories of the lack of governor dissents. According to the first, the governors have no sway and therefore almost never dissent. According to the second, blocs of governors can have material influence simply because of the threat of casting dissenting votes. Which one is right?
Here's an important piece of evidence to help us decide which of these two views more accurately reflect reality. In 2013, a bloc of three governors (Elizabeth Duke, Jeremy Stein and Jerome Powell) worked together to push Chairman Ben Bernanke to initiate the tapering of asset purchases begun in the aftermath of the financial crisis. Bernanke summarizes his perception of the situation in Chapter 23 of his memoir, "The Courage to Act": "I told them that while my view on securities purchases differed from theirs, I would do my best to accommodate their preferences. 'My position as Chairman is untenable if I don't have the support of the Board,' I told them."
I would expect that, if Shelton and Waller were to threaten to dissent, the current chairman, Powell, would react in much the same way that Bernanke did in 2013. The pressure on him would be even greater if other governors and Federal Reserve Bank presidents were to threaten to join Shelton and Waller. And I see no reason why monetary-policy experts like Shelton and Waller would acquiesce to whatever the chairman wants. All told: I anticipate that, if they are confirmed, Shelton and Waller's preference for easy money would lead the Fed toward lower interest rates, implying higher employment and faster inflation.
Narayana Kocherlakota is a Bloomberg Opinion columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.