Monetary Policy Disagreement Plagues the FOMC

Sources:

Federal Reserve: Minutes of the Federal Open Market Committee on September 20, 21, 2011

Forbes: Split in Bernanke’s Fed Widens, QE3 on Deck, FOMC Minutes Reveal

LA Times: Federal Reserve Minutes Show 2 Policymakers Wanted Bolder Steps

WSJ: Fed’s Pianalto-Monetary Policy Alone Cannot Solve All Ills

WSJ: Inside The Fed Fight Over Bond Buys

The Federal Reserve (Fed) is in the spotlight yet again. Just weeks after announcing Operation Twist, the Fed’s most recent attempt to lower long-term interest rates by selling short-term government debt and purchasing $400 billion in long-term Treasury securities, the decision has come under intense scrutiny. While economists continue to debate the effectiveness of Operation Twist, it appears that the members of the Federal Reserve Open Market Committee (FOMC) intensely debated the issue among themselves during their September 20 and 21, 2011 meeting. The minutes of the meeting indicate much disagreement among FOMC officials over what action, if any, the Fed should take to boost the economy. The dissention among FOMC members underscores the difficulties in implementing monetary policy measures in the current economy and the lack of consensus on how to address the U.S. economy’s problems.

The FOMC is the monetary policy arm of the Fed. All seven members of the Federal Reserve Board of Governors serve on the FOMC and five of the twelve Federal Reserve Bank presidents serve on a rotating basis, with the exception of the President of the Federal Reserve Bank of New York who is a permanent member of the committee. Though the FOMC only has twelve voting members, all Federal Reserve Bank presidents attend FOMC meetings and participate in discussions. Immediately after each meeting the Committee issues a single policy statement summarizing its outlook and policy decisions; however, the minutes of FOMC meetings are not published until three weeks after the conclusion of the meetings.

The minutes from the September 20-21 meeting are receiving so much attention because the FOMC is close to exhausting its available economic tools after repeatedly intervening unsuccessfully in the economy. Although differences of opinion are not uncommon within the FOMC, the minutes show the highest level of dissent among committee members in past twenty years, and reflect the conundrum in which the U.S. economy remains. The minutes reveal that three committee members dissented because they felt the Fed has done all it can and further intervention will hinder recovery. At the other end of the spectrum, two committee members felt the Fed should do more than just implement Operation Twist.

While the U.S. economy faces challenges not seen since the Great Depression, the stalwarts of U.S. economic decision making seem to be suffering from an identity crisis. The lack of consensus within the FOMC as to its proper role may undermine consumer confidence and fuel further recessionary fears. However, the diverse opinions of the divided committee may result in more creative solutions and better decision-making.