FED FOCUS-Political heat may unite Fed, suppress dissent

By Jonathan Spicer

NEW YORK, Jan 7 (BestGrowthStock) – Open dissent within the U.S.
Federal Reserve this year could set it up for damaging outside
criticism, raising the stakes for new Fed voters tempted to
take a stand against Chairman Ben Bernanke.

Critics in both the U.S. Congress and foreign capitals
attacked the central bank late last year after it decided to
ratchet up its bond-buying by $600 billion, an aggressive
stimulus plan that took it further into unchartered terrain.

Bernanke and other top Fed officials defended the plan
vigorously, and the Fed’s cautious stance appeared to gain
vindication on Friday when a U.S. jobs report showed a very
muted recovery in the labor market. For details, see
[ID:nN06134458] [ID:nN06147394]

Yet opposition could return, and even be amplified, this
year as two regional Fed presidents known to be uncomfortable
with Bernanke’s policy get their once-in-three-years turn to
vote on the central bank’s policy-setting Federal Open Market
Committee.

“The more you see divisions aired publicly from the FOMC,
the more critics outside the Federal Reserve system may feel
emboldened to speak up,” said Dana Saporta, an economist with
Credit Suisse in New York. “That’s definitely the potential,”
she said.

Last year, Kansas City Federal Reserve Bank President
Thomas Hoenig was the reliable, lone contrarian on the FOMC.
His dissenting votes were a mainstay, and thus probably lost
some impact as observers tried to determine the nature of
debate within the Fed over monetary policy.

This year, Philadelphia Fed President Charles Plosser and
Dallas Fed chief Richard Fisher rotate into voting slots on the
policy panel. Both are seen as inflation “hawks” and have
raised questions about the efficacy and unintended side effects
of the Fed’s second round of asset-buying, or quantitative
easing, known as QE2.

Minneapolis Fed President Narayana Kocherlakota, another
contrarian, will also have a vote this year, though he has come
out in favor of the policy.

All this paves the way for some potential surprises when
the FOMC meets for the first vote of 2011 on Jan. 25 and 26.

“One dissenter can be viewed as a rogue. But once you start
getting more than one it looks like a serious disagreement and
makes it much more difficult for the Fed to make policy,” said
Nigel Gault, chief U.S. economist at IHS Global Insight in
Lexington, Mass.

“It does raise the bar a little bit for the potential
dissenter in that they really have to be sure that they want to
make that statement, by deciding to dissent,” he said.

SPEAKING UP

Loud and sometimes acerbic opposition met the Fed’s
decision on Nov. 3 to buy $600 billion in Treasury securities
by the end of June.

China and Germany were among those warning that QE2 could
spawn asset bubbles in emerging economies, complaining it would
keep the U.S. dollar artificially low.

President Barack Obama defended the policy — an unusual
move for a U.S. president — while many conservative economists
and Republican lawmakers said it set the stage for a spike in
damaging inflation. Two GOP lawmakers pledged to introduce
legislation to rewrite the Fed’s mandate by stripping it of its
focus on jobs, leaving low and stable inflation the only goal.

A number of regional Fed bank presidents, including
Kocherlakota and Sandra Pianalto, the moderate Cleveland Fed
chief, joined top officials in saying QE2 was needed to fend
off deflation and lower an unemployment rate stuck near 10
percent.

On Nov. 8, just five days after the Fed agreed on its
latest bond-buying program, Fisher called it the “wrong
medicine” for the economy. But in his last public remarks on
Dec. 1 he was more restrained.

“Perhaps they saw the need for the Fed to circle its wagons
a bit in the face of threats to the very independence of the
central bank,” said Credit Suisse’s Saporta. “It may be the
case that some of the other voting members, even if they had
reservations, wouldn’t dissent outright” in 2011, she said.

Fisher and Plosser — who has repeated in recent months
that QE2 is more trouble than it is worth — dissented together
in 2008, when they last sat on the FOMC, in favor of a
less-accommodative monetary policy. Both are scheduled to
deliver speeches next week that could shed light on their
current thinking.

Many analysts see public, dissenting views as a result of
the give-and-take Bernanke encourages to ensure Fed members
think through difficult decisions, especially as the central
bank pushed deeper into its unprecedented stimulus plan.

Government data on Friday showed U.S. employers hired far
fewer workers than expected last month, with a large number
giving up the search for work — dark economic news likely to
play into the hands of “dovish” Fed members who endorse QE2.

Still, from retail sales to trade data, there are many
signs of economic improvement.

“If we’re looking at all the information coming in, things
are better,” said William Larkin, fixed income portfolio
manager at Cabot Money Management in Salem, Massachusetts.

“As you start to get a consensus change (at the FOMC), that
means there is more discussion about the clutching mechanism of
going from easing to potentially neutral,” he said.

“It’s going to be a new game … and it’s going to help get
the market ready for the change.”
(Additional reporting by Ann Saphir in Chicago; Editing by Dan
Grebler)