A primer for understanding the Fed

2011-11-01 14:11:17

Forget hockey, maple syrup and a lexicon inspired by British spelling. There is nothing that showcases the difference between Canada and the United States better than monetary policy.

WASHINGTON-- Forget hockey, maple syrup and a lexicon inspired by British spelling. There is nothing that showcases the difference between Canada and the United States better than monetary policy.

We keep it simple. The government gives the Bank of Canada a mandate to keep annual inflation at a rate of 1 per cent to 3 per cent. That mandate is ultimately the responsibility of one person, the governor of the central bank. It's very orderly.

Our American cousins like their monetary policy chaotic. The central bank has two mandates: Employment and price stability, yet with no defined target for either. The chairman of the Federal Reserve retains significant influence, but he holds one vote on a policy committee that can number as many as 12 people. Unlike in Canada, where central bankers stick to the script, Fed policy makers go around the country - and the world - saying whatever they feel like. It makes one wonder what is said in private.

Decision-making at the Fed rarely has been more fraught than it is currently. At the last two policy meetings, three of the 10 members refused to go along with the consensus, marking the most intense division in two decades, according to Bloomberg News. There is little reason to think those divisions have softened, setting the stage for another lively meeting when the Federal Open Market Committee gathers on Wednesday.

Here is a primer for understanding the Fed debate:

The Fed system consists of the seven-member Washington-based Federal Reserve Board, led by chairman Ben Bernanke, and 12 regional Fed banks. Every member of the Reserve Board sits on the FOMC, as does the head of the New York Fed. Four of the remaining 11 regional Fed presidents sit on the committee for one-year terms on a rotating basis. The FOMC currently consists of 10 people because two positions at the Reserve Board are unfilled. Those are voters. All regional Fed presidents participate in FOMC meetings, even when they lack a vote on policy.

Wall Street economists tend to label central bankers who are more concerned about economic growth as doves and policy makers who are worried about inflation as hawks. At the Fed, the doves outnumber the hawks.

But a core group of regional Fed presidents has voted against Fed policy at the last two meetings, attracting significant attention. This group is only a vocal minority, and has failed to convince the Fed's core leadership group that further monetary stimulus only risks stoking inflation.

Having just announced a $400-billion (U.S.) stimulus measure in September, the Fed likely will stand pat this week. But make no mistake: The Fed is a central bank ready to act if the U.S. economy continues to languish. The doves dominate.


Meet the players


Ben Bernanke

Chairman, Federal Reserve Board of Governors; Chairman, Federal Open Market Committee

"This unemployment situation we have, the jobs situation, is really a national crisis."

- Late September

Janet Yellen

Vice Chairwoman, Federal Reserve Board of Governors

"Securities purchases across a wide spectrum of maturities might become appropriate if evolving economic conditions called for significantly greater monetary accommodation."

- Oct. 21 in Denver

William Dudley

President, Federal Reserve Bank of New York; Vice-Chairman, Federal Open Market Committee

"It's possible that we could do another round of quantitative easing."

- Oct. 24 in New York


Richard Fisher

President, Federal Reserve Bank of Dallas; Voter

"We have done enough."

- Oct. 24 in Toronto

Narayana Kocherlakota

President, Federal Reserve Bank of Minneapolis; Voter

"The committee's actions ... diminish the committee's credibility and so reduce the effectiveness of future committee actions and communications."

- Oct. 13 in Sidney, Mont.

Charles Plosser

President, Federal Reserve Bank of Philadelphia; Voter

"The actions taken in August and September risk undermining the Fed's credibility by giving the impression that we think such policies can have a major impact on the speed of the recovery."

- Oct. 12 in Philadelphia


Charles Evans

President, Federal Reserve Bank of Chicago; Voter

"If we sit on our hands as the economy withers relative to our mandate, then we could take a huge hit to our credibility."

- Oct. 18 in Detroit

Daniel Tarullo

Federal Reserve Board of Governors

"The fact that these problems cannot be solved quickly does not mean there is nothing to be done. Without more, the harm to the unemployed and their families continues, and the risks of longer-term harm increase - both to the unemployed and to the country as a whole."

- Oct. 20 in New York

Sandra Pianalto

President, Federal Reserve Bank of Cleveland; Voter in 2012

"A particularly troubling aspect of our current unemployment problem is the long duration of unemployment experienced by many individuals."

- Oct. 20 in Toledo, Ohio

John Williams

President, Federal Reserve Bank of San Francisco; Voter in 2012

"The real threat is an economy that is at risk of stalling and the prospect of many years of very high unemployment, with potentially long-run negative consequences."

- Sept. 7 in Seattle


Dennis Lockhart

President, Federal Reserve Bank of Atlanta; Voter in 2012

A resumption of large-scale asset purchases "requires circumstances that we are not facing at the moment - that is, the onset of a recession, deflationary pressures and seriously rising unemployment."

- Oct. 18 in Chattanooga, Tenn.

Jeffrey Lacker

President, Federal Reserve Bank of Richmond; Voter in 2012

"The factors likely to be restraining growth - from empty houses to prospective tax rates - are nonmonetary and largely beyond the power of the central bank to offset through easier monetary conditions."

- Oct. 17 in Salisbury, Md.