Federal Reserve: Crack in the Armor
Something remarkable happened on the monetary policy front Friday. Robert Kaplan, President of the Federal Reserve Bank of Dallas, suggested that it may be time for the central bank to start thinking about reducing monthly bond purchases that have been running at $120 billion per month since the start of covid. Significance of the statement was heightened by the fact that it followed by just two days Chairman Jerome Powell’s statement that such purchases would continue indefinitely.
Kaplan’s statement, the first sign of fissure in the seemingly monolithic Fed position on continued easy policy, was a factor in US equities falling in the final trading day of April. Despite data Friday morning that consumer spending rose sharply in March, and household income surged by a record 21.1%, all major US equity indexes were down by more than 0.5%.
Kaplan’s statement to the Montgomery Area Chamber of Commerce will likely have little impact on Powell’s policy-making powers any time soon. Kaplan is not a voting member of the Federal Open Markets Committee this year and, therefore, was not part of the unanimous vote to keep policy unchanged. His nonvoting status may be why he chose to express his disagreement with the Chairman in public.
Still, it shows that, at the least, Kaplan is beginning to subscribe to the view that “excesses and imbalances in financial markets” [Kaplan’s words] call for a rethink of policy. He pointed to the stock market being at record levels, narrow credit spreads and surging home prices as areas of concern. These are issues that some of us have been worried about for some time but ones that have not led the Chairman to shift policy.
First, for some history. It is rare for Fed members to express disagreement with the Chair, either through their vote or in public. But it has happened from time to time. On September 16, 2008, the day after Lehman Brothers was allowed to go bankrupt, Eric Rosengren, President of the Federal Reserve Bank of Boston, wondered whether it had been a wise decision on the part of the US Treasury and the Federal Reserve to let the investment bank go down.
We also have the much noted instance of February 1986 when Fed Chair Paul Volcker faced dissent from the Board’s own Vice Chair, Preston Martin. The Reagan administration wanted to speed up economic growth ahead of the 1988 presidential elections, and Martin was a Reagan appointee who sought an immediate reduction in the discount rate. Volcker wanted to delay the move until he got other leading central banks, including those of West Germany and Japan, to go with him in lowering rates. Volcker subsequently decided not to seek another term and was succeeded as Chairman by Alan Greenspan.
Opposition from Kaplan will not have a similar impact on Powell. Given his good relations with Treasury Secretary Janet Yellen — a former Fed Chair herself — he will probably serve another term when his current one ends next February 1. However, the dissent does show that the speculative fervor in markets we are witnessing is having an impact on at least one member’s thinking.
Will opposition to the Powell position build as market excesses continue through the year? That is a crucial issue for investors to ponder.
Komal Sri-Kumar
President, Sri-Kumar Global Strategies, Inc.
Santa Monica, California
May 2, 2021
Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.
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