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Bernanke Time Commitment Provokes Most Dissents Since 1992

Tuesday, 09 Aug 2011 07:24 PM

 

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Aug. 9 (Bloomberg) -- Ben S. Bernanke lost the full consensus of the Federal Open Market Committee as he reached for another non-traditional tool and provoked three dissenting votes in the process -- the most for a Federal Reserve chairman since 1992.

For the first time today, U.S. central bankers specified a date for their commitment to low borrowing costs, saying the benchmark rate will stay in a range of zero to 0.25 percent at least through mid-2013. The new language replaces their prior promise to keep rates low for an “extended period.”

Today’s decision shows that a Fed chief can govern with more than two opposing votes, and it opens the door to bolder action if necessary, said Roberto Perli, a former economist in the Fed’s Division of Monetary Affairs, which helps craft the language of the FOMC statements.

“We have reached the point where Bernanke is taking control and saying we have to do the right thing no matter how many people dissent,” said Perli, a managing director at International Strategy & Investment Group in Washington. “It shows the committee can move forward.”

Seven members of the panel favored the action. Richard Fisher, president of the Federal Reserve Bank of Dallas, Charles Plosser of Philadelphia and Narayana Kocherlakota of Minneapolis voted no, preferring to maintain the existing “extended period” language. The last time three FOMC voters dissented was on Nov. 17, 1992, under Bernanke’s predecessor, Alan Greenspan.

History of Discomfort

Fed officials have a long history of discomfort with pledges that limit their policy flexibility, minutes of their meetings show. The deterioration of the economic outlook, and the limits of monetary policy when interest rates are already near zero, prompted Bernanke to opt for the time commitment -- even at the cost of three dissenting votes, said former Fed Governor Laurence Meyer.

“He must be unhappy about that, but with no regrets,” said Meyer, now a senior managing director at Macroeconomic Advisers LLC. “The chairman is the decider, and he will do whatever he thinks needs to be done.”

Ten-year Treasury yields touched a record low, and U.S. stocks rebounded from the worst drop since 2008. The Standard & Poor’s 500 Index gained 4.7 percent to 1,172.53 at the 4 p.m. close of trading in New York. The 10-year yield fell as low as 2.03 percent before paring its decrease to 2.25 percent.

The Federal Open Market Committee lowered its economic assessment, saying it now “expects a somewhat slower pace of recovery over the coming quarters.” It left the door open for more action, saying it discussed “the range of policy tools available to promote a stronger economic recovery.”

More Action

The dissents may have weighed against stronger action for now, said Vincent Reinhart, a former director of the Monetary Affairs Division. With the dissents out of the way, the FOMC majority could push for further easing at the Fed’s annual conference in Jackson Hole, Wyoming, later this month, he said.

“The dissents signal a strongly divided committee,” said Reinhart, a resident scholar at the American Enterprise Institute in Washington. The Bernanke majority “did less than they wanted to probably. But they set themselves up for Jackson Hole to be a midcourse correction.”

--Editors: Vince Golle, Christopher Wellisz

To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Jeannine Aversa in Washington at javersa@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

© Copyright 2014 Bloomberg News. All rights reserved.

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