Fed Policy and How Committees Work

• Posted by Greg Harmon
• on September 23rd, 2013

There is still a lot of jawboning about the Fed’s ‘decision’ to do nothing at the policy meeting last week. I have read dozens of articles and heard more interviews with analysts as to why this was wrong. Most believe that the communications set the expectation for a taper of stimulus. And by not delivering the Fed missed an opportunity. This could be the right way to think if the Fed was a democracy. But it is not.

Let’s start with the facts: There is one Chairman of the Federal Reserve, Ben Bernanke. If you understand that then you can get rid of a whole lot of extra noise. Richard Fisher’s comments today fall into that category. Even though he (and others) may be right, he is not Ben Bernanke. Maybe it is not fair to totally disregard Fisher’s comments. They do validate part of the reasoning as to why the Fed did nothing. Let me explain.

I actually think this is pretty easy to figure out if you have ever been part of a committee. A committee works by consensus. The Chairman is supposed to be smart and a consensus builder. As the group comes to agreement on various aspects they can become part of a cohesive policy. This is how you get a stance that uses unemployment targets, and growth prospects and inflation boundaries. When they do establish a consensus then the group can communicate a policy. Either re-iterating an existing policy or changing the policy.

But what happens when the group cannot come to a consensus? That is what we are dealing with. Richard Fisher’s and others comments, make this easy to see. And they seem to be showing a widening gap in prospects for the economy. When a committee cannot come to a new consensus they do nothing. If it takes a consensus to change policy, how can that policy change if the Chairman is trying to be clear in one direction and others are trying to be clear, more loudly, in another direction. It is set up to stay constant. There is one more possibility; That the Chairman forces his view out. The Chairman will not endorse a policy change that he or she is not in agreement with. So if the Chairman is saying one thing, making the case that policy will not change until certain measures say it should, and others are saying that policy should change what happens? Nothing! Either the Chairman wins or everyone wins on a Committee. That is how it works.

Carry on.

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